How we invest at Sidekick
A modern investment manager for a changing world
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Over the last 40 years, a traditional approach to investments — like a passive 60/40 portfolio invested in stocks and bonds — delivered high real returns. But in a rapidly changing world, modern investors need a forward-looking approach that takes advantage of new opportunities to build wealth.
At Sidekick, we’re building a modern investment manager that can succeed in the world of tomorrow. So, to help investors face the challenges ahead and take advantage of new opportunities, we’re building our proposition around three key pillars:
- Expertly managed portfolios
- Access to modern alternative assets
- An open and engaging investor experience
Our goal is to unlock long-term wealth-building opportunities like those enjoyed by high-net-worth investors (usually defined as those with more than £250,000 of investable assets).
Here’s what each of these pillars looks like in practice…
Pillar 1: Expertly managed portfolios
Why do retail investors need an expert investment team?
Today’s retail investors are often left to choose between two extremes. They can choose passive investment products that, by design, offer little opportunity for market-beating returns. Or they can try to pick outperforming stocks themselves.
But there are more than 50,000 listed companies[1] and more than 8,000 listed ETFs (baskets of stocks) worldwide[2]. Navigating them is difficult enough for a seasoned investment professional with access to cutting edge tools and dedicated research teams. For a retail investor, it can be paralysing.
In a state of decision paralysis, without access to the right tools and data, retail investors often invest in fashionable thematic ETFs[3][4] or stocks that have done well historically. Professional investors call this strategy ‘investing using the rear-view mirror’[5]. Our experience, and academic research [3][4], suggests it’s not a recipe for long-term investment success.
Research conducted over a nine-year period suggests that doing the opposite of what retail investors are doing (i.e. buying the ETFs that retail investors are selling) generates better returns[6]. This finding is further supported by research suggesting that up to 80% of retail investors who pick stocks directly lose money[7].
A study by the FCA (the UK financial services regulator) sheds some light on the possible reasons why retail investors generally perform so poorly. According to the FCA, inherent cognitive biases are particularly likely to affect retail investors[8]. There are many reasons for this:
- The complexity of financial products.
- The fact that, in general, people are poor statisticians.
- People’s decision-making is often clouded by emotions like fear or overconfidence.
The world and its financial markets are becoming more complex every day. An avalanche of real-time data, news and analysis means that retail investors increasingly need experts to find actionable investment ideas amongst all the noise.
What does expert portfolio management look like?
The investment industry hasn’t escaped the relentless rise in complexity. Once we’ve been authorised by the FCA, Sidekick customers will have a third option: to have their investment portfolios managed by a team of trusted experts.
When we launch, Sidekick customers:
- will no longer have to settle for generic passive portfolios that don’t reflect their values and principles.
- will no longer be overwhelmed by choice or tripped up by cognitive bias.
Successful investment management requires experience, dedication, access to data and the latest tools.
Our investment team has deep experience in areas critical to long-term success. This includes accounting, statistics, computer science and economics.
We will use the same data, research and quantitative tools as some of the biggest institutional asset managers in the world[9]. This includes access to high-end news and data services like Bloomberg that can cost thousands of pounds per month and are out of reach for the average retail investor.
Large institutions serving high-net-worth individuals have always had access to these critical resources. On launch, Sidekick’s clients will benefit from an expert investment team that has access to these resources too.
Our investment philosophy is long-term and focused. We take our responsibility as stewards of capital seriously. So we invest rather than speculate.
Our general investment approach carefully combines both top-down macroeconomic and bottom-up fundamental analysis. This can be broken down into four parts:
- Growth potential: We start by identifying structural growth trends, like the accelerating shift to a digital economy. We then look for investments that stand to benefit from these trends over the long term.
- Sustainability: We carefully consider the sustainability of investments. We think about important issues like climate change and how they might impact individual companies and entire sectors in the future.
- Value for money: We value investments carefully using tried and tested methodologies. This is a core part of our risk management process. We don’t simply buy growth at any cost. Experience has taught us that over the longer-term the price you pay determines the return you get.
- Risk Management: We construct portfolios and manage risk using advanced global multi-asset risk models. This rigorous quantitative approach helps us better identify any unintended factor risk exposures.
Pillar 2: Access to modern alternative assets
Why do retail investors need access to alternative assets?
Alternative asset classes include any investable assets other than traditional listed stocks, bonds and cash. Institutions and high-net-worth investors have been able to access alternative investments for decades. The allocation of alternative investments in institutional portfolios has grown from 5% to more than 25% since 1996[10]. But, for the most part, retail investors have been left behind[11].
Alternative investments have increased in popularity because they offer the promise of higher risk-adjusted returns when added to a traditional portfolio consisting of stocks, bonds and cash. Adding asset classes with low correlations has the potential to enhance portfolio returns and reduce volatility.
So why haven’t retail investors enjoyed the same access to alternative investments? Part of the reason is due to high minimum investment amounts and long lock-in periods. But this is changing. Technology is enabling access to alternative assets while giving you the ability to sell when you need to.
Blockchain technology is enabling the tokenisation of both real and digital assets. This process converts the ownership rights of an asset into digital form on a blockchain. So, in the future, you’ll no longer need to buy a whole house or piece of art. Instead, you can simply buy the fraction you can afford and get all the same benefits.
The benefits of tokenisation include an increased ability to sell when you need to, lower cost and better risk management. Most importantly, it’ll give retail investors improved access to alternative investments.
The tokenisation of real and digital assets is quickly gaining momentum. Some leading institutional investors, like Blackrock, believe there’s a place in long-term institutional portfolios for digital assets and cryptoassets[12]. We agree. But we also know this needs to be carefully managed.
How will Sidekick help customers access alternative assets?
Responsibly. Our goal is to make sure our customers don’t miss out on exciting long-term wealth building opportunities in the alternative asset space, whilst ensuring there are strong protections in place. The availability of alternative assets is expanding quickly and there are many innovative companies providing improved access to everything from disruptive tech startups to classic cars, Old World wines and cryptocurrencies. But not all alternative investments are created equal. Some will have an important role to play in a long-term investment portfolio and some won’t. We see it as our job at Sidekick to sift through the noise and provide access to those alternative assets that can add value over the long-term.
To provide access to a broad range of alternative and cryptoassets, we’ll be working exclusively with trusted and reputable partners. We will conduct robust due diligence on all our business partners and manage portfolios prudently to ensure our customers are not exposed to unsuitable risks.
The alternative asset space is exciting and offers a real opportunity to build wealth over the long-term but parts of the industry are still in a very early development stage. In our opinion, investment expertise is critical to manage risk effectively and build long-term wealth.
Pillar 3: An open and engaging investor experience
Do today’s retail investors really want to be involved in the investment process?
Yes. Today’s investors do want to be more involved in the investing process, according to our own research:
- They want to take ownership of their investments.
- They want their portfolios to reflect their values and principles.
- They care about issues like the environment and social equity.
- They want to understand how their views influence the makeup of their portfolios.
They also often feel frustrated by complex information and financial jargon. They want clear, timely and relevant updates on their portfolios, performance, and market news.
So we’re building Sidekick to make it happen.
How will Sidekick engage with customers while keeping it personal and relevant?
With Sidekick, our customers will be kept fully informed. We’ll send out timely and relevant news and portfolio updates via the Sidekick app or by email. We want to build easy to use features right into the app that improves access to our investment team.
Our goal is to keep customers updated about changes to their portfolios while making sure they never lose sight of the bigger picture. So, we’ll explain why we buy or sell investments and how this aligns with our medium and long-term views. We’ll also send regular updates about important market events and explain why it matters and how it might impact customer portfolios. We’ll do it all using clear, easy-to-understand language.
By being transparent about our investment process and keeping our customers in the loop, we hope to turn them into better and more confident investors.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in. Cryptoassets are only regulated in the UK for money laundering purposes. If you invest in these types of assets, you are unlikely to be protected if something goes wrong.
References
[1] https://focus.world-exchanges.org/articles/number-listed-companies
[2] https://www.statista.com/statistics/278249/global-number-of-etfs/
[3] https://www.ft.com/content/7e16172e-ce51-4c41-a139-3a796790bbbe
[4] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
[5] https://www.berkshirehathaway.com/letters/1982.html
[6] https://academic.oup.com/rof/article/25/4/937/5919085?login=false
[7] https://www.ig.com/ie/markets/indices/what-are-indices-how-do-you-trade-them
[8] https://www.fca.org.uk/publication/occasional-papers/occasional-paper-1.pdf
[12] https://www.ft.com/content/0948f1a9-ad0b-4126-9ae8-5ce4e212c07e
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