Preserving the real value of wealth and putting its capital to work requires careful deployment and supervision. This is especially relevant for professional trustees for whom the demands of trust law are highly exacting.
At London Trust we put capital preservation before capital growth. Since recovering a deep loss requires an even greater percentage gain in order to make good that loss, it is imperative never to lose sight of the downside risks especially when markets are infused withirrational exuberance. Upside potential, in a manner of speaking, takes care of itself. This approach, together with the mathematical power of compounding income, is the hallmark of prudential investment.
Now regarding our methods, we preserve capital via an emphasis on diversification, liquidity, risk management (modern portfolio theory) and duration. Duration theory should be singled out for special mention. It allows us to forecast a rate of return and the estimated time necessary for that return to materialise. Moreover, the longer the Duration the greater the estimated return and visa versa. In this way a trustee has the means of increasing returns where the time horizon permits it and by the same token he avoids crossing the Duration line that divides investment from speculation.
Our calculations where appropriate are assisted and underpinned by the use of reliable variables such as the level of long term growth of GDP that is applicable in each case. Other important attributes include price/earnings ratios and measurements of risk appetite.
After the capital's deployment, we periodically rebalance the Duration keeping it in line with the plan. This limits the downside risks that increase during speculative phases or market bubbles.
As professional trustees, Duration, Diversification and Liquidity are the three keystones for defending wealth from deep and irretrievable loss while holding up the reasoned expectation of compounding respectable investment returns year after year.