facebook tracking pixelHow are the portfolios in the comparison tables selected? | Cushon
Cushon Logo

How are the portfolios in the comparison tables selected?

If you pick a CushonMix portfolio you can get the benefit of a fully optimised portfolio without having to pick individual funds yourself. We're the only people making this sort of choice available directly to consumers.

The CushonMix portfolios in our comparison table are selected by a mathematical algorithm to maximise diversification and find the highest possible projected return at a given level of risk.

The portfolios are updated every single day to reflect the latest market conditions, fund performance and fund manager charges. So you can always be confident they're completely up to date.

Our approach eliminates the need for judgement about the skill of different fund managers and is based on the same technology that big financial services companies use when they are managing their own money.

So how does the algorithm work?

It seeks out the combinations of funds that are as uncorrelated as possible...

It's surprising how similar most funds are. When you analyse historic performance over the medium term, the majority of funds are 80% correlated or more. This is particularly apparent when the analysis takes account of more extreme market conditions such as the 2008 crisis.

Actual correlation plot of approx 1500 funds. Darker blue means 100% correlationChart showing correlation of UK Collective funds - darker blue is more correlated

Our algorithm seeks out the combinations that are as uncorrelated as possible by looking at how similar the returns on each pair of funds are. This analysis looks back to the early 1990s so includes many different types of market conditions: booms, crashes, and periods of relative stability.

We believe this is more reliable than approaches based on asset allocation or "portfolio X-rays". These types of approaches are usually based on the intuition of how things ought to be, not empirical evidence of how they actually are. This is particularly true in extreme market conditions, where most assets turn out to be more correlated than one might intuitively think.

The result of this is that our portfolios are usually made up of combinations of funds that are unlikely to be identified by someone following an asset allocation based approach.

If you're interested in how much difference this makes, try our free investment checkup service. Here you can provide any existing portfolio and see how the projected returns and risk compares to the portfolios in our comparison tables.

...and finds the cheapest possible way of investing...

Given how highly correlated most funds are if all else is equal the algorithm will always favour cheaper funds. This means that the CushonMix portfolios are mostly made up of cheaper "tracker" funds.

The more expensive fund managers would argue that their charges will be more than compensated for by their skill in managing investments. However, most independent studies conclude that this is not the case.

In some circumstances the algorithm will include a portion of more expensive "actively managed" funds, but only if there is no cheaper way of obtaining the same quality of diversification. For example, property funds can provide useful diversification, but tracker funds for property are very uncommon because they require owning and managing physical buildings (unlike shares).

...which means our algorithm finds the highest likely returns available, given the risk category

Risk and return are inextricably linked by something called the risk premium, which is the investor's compensation for taking some risk.

Other than diversification and lower charges, the only way to increase projected returns is to take more risk.

So, the combinations of funds that are as uncorrelated as possible and as cheap as possible are the portfolios that, on the balance of probability, are most likely to give the best returns.

But it is only about probabilities. Our portfolios should improve your chances, but investing is always risky and it is still possible that you could lose money.

And remember... we are completely impartial

Unlike some companies, we're very transparent about how we make our money. We do not accept any commission or other payment from fund managers so you can be confident that our comparison tables are completely objective.

We only work for you and get paid via a 0.3% per annum charge on your investments. That's why you'll never find any "best buys", "top 150's" or other things like that.