NOVEMBER 2023
Better value for less cost: The rise of MPS continues
4,000
UK Financial Conduct Authority-registered financial adviser firms are currently using MPS
of UK wealth managers expect to use MPS more over the next year
46%
of advisers say that performance is the most important feature of an MPS with cost a close second (80%)
82%
In this issue...
quarter of 2002. Growth has been underpinned by trends including the growing demand for customisable investment products, the rise of ESG investing, and new entrants fueling competition in pricing.
Costs and communication
Assets pour into the MPS sector as costs and Consumer Duty refocus advisers efforts to ensure client money is being put to good use
gainst a backdrop of volatile and changing capital markets, the increasing use of managed portfolio services (MPS) is reshaping the investment advisory industry. This year has seen renewed opportunity in the sector as gross sales of managed portfolio services bounced back 13% over the first half of 2023, up from the third
A
With MPS becoming the default option for advisory firms, providers and managers have had to broaden their opportunity set across asset classes and strategies. Today, a diverse range of model portfolios cover themes such as ESG, value, growth, alternatives, and numerous diversification strategies that aim to provide uncorrelated returns with traditional markets.
For advisers, the shift into MPS not only brings cost efficiency for their clients, but it also outsources increasingly complicated asset management and portfolio responsibilities. This allows advisers to spend more time on core financial planning, building and maintaining important client relationships, while retaining discretionary control over their clients’ accounts
This is important, as advisers say communication has become more crucial over the last few years, with clients increasingly looking to advisers to guide them through ongoing choppy markets, high inflation, high interest rates and an uncertain economic backdrop. MPS means advisers can access the expertise of investment managers.
Meanwhile, costs continue to rise in importance, and this is seen acutely in the ongoing active-passive tug-of-war. For the third straight quarter in Q2 2023 passive funds, which can be around a quarter of the cost of actives in terms of underlying holdings, accounted for more than 30% of model gross sales. As consumers continue to be cost sensitive, an increasing number of providers are offering a hybrid solution. Here, passives are used to keep costs down while actives are used in sectors where there could be more opportunity.
With the introduction of Consumer Duty in July 2023, the regulatory requirements of Value Assessment have arrived for MPS. Providers are under scrutiny to ensure they deliver value to clients as well as good outcomes. To comply, firms will need to review and adapt their practices, some of which may require changes in product design, client engagement, documentation and other aspects of their operations.
Consumer Duty improvements
For advisers, this is good news because it means more transparency and more accountability. All providers will need to document and demonstrate the details behind their solution in terms of service and value. Additionally, to meet fair value requirements, firms will need to take a hard look at their fees which could challenge some out-of-date charging structures.
While Consumer Duty could bring some disruption to MPS, increased transparency, improvements, and accountability will make MPS more appealing to advisers as they continue to scrutinise performance and cost in an era of high inflation, high interest rates and a high cost of living.
Over
A solution that a wide-range of investors can capitalise on
Passive and active – the case for both
Ben Gutteridge, Director of Model Portfolio Services
INSIGHT
Q&A WITH...
Francis Chua, Fund Manager James Giblin, Fund Manager
Andrew Miller, Lead Investment Director Stuart Clark, Portfolio Manager
A duty to our customers
Tatton Investment Management
A modern discretionary partnership
Gillian Hepburn, Head of UK Intermediary Solutions
It’s a stock, it’s a bond, no! It’s an alternative!
MPS WATCHLIST
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients in the UK and is not for consumer use. All information as at 30 June 2023 and sourced by Invesco,unless otherwise stated.
Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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Fabio Faltoni, Multi Asset Product Director
“Because each strategy has its own strengths and drawbacks, we think investors should utilise the best of both worlds by employing a blended approach”
David Aujla, Multi Asset Fund Manager
While tempting to make an ‘all-or-nothing’ active vs passive decision, we believe investors should explore the possibility of combining both approaches, thus allowing their portfolios to benefit from the advantages that each have to offer.
t Invesco, we spend a considerable amount of time thinking about portfolio construction. For some of our multi asset portfolios, this means thinking about active and passive investment styles; an old-age and perhaps controversial debate, as proponents on each side are equally convinced that their approach is superior.
They offer an affordable way to access markets. The post-GFC (global financial crisis) period has been highly conducive for passive indices to outperform their active counterparts. The range of available passive instruments has increased considerably (e.g. geography, sector, duration) giving investors a wider investment choice.
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The inability to outperform “the market” in rising and, particularly, in falling markets. In volatile times, the tracking error of passive indices tends to increase, making their performance less predictable. Passive indices are often tainted with construction biases, such as a high concentration risk in a limited number of securities.
Nevertheless, passive management is not a cure-all solution. Investors should take note of some of its limitations, including but not limited to:
Their numerous benefits have been widely documented. Amongst other things:
Because each strategy has its own strengths and drawbacks, we think investors should utilise the best of both worlds by employing a blended approach.
Taking full account of the relative pros and cons, we believe it can be advantageous to invest passively where there is an implementation (easy access to a suitably diverse range of investments) or cost (results similar to active management but with lower fees) advantage and actively in less efficient markets where there tends to be more scope to make a difference in performance.
Crucially, none of this is to suggest there is a definitive balance to be struck between both investment styles. Depending on market conditions and other considerations, any number of blends of the two may prove effective.
The key point is that the need for creative and flexible portfolio construction and asset management is greater now than it has been for a long time and that what worked well in the past might not work so well now or in the future.
The case for a blended approach
Passive funds – arguably one of the most revolutionary innovations in investment history - have grown in popularity in recent years.
The view on passive
While passive managers seek to own all the securities in a given index, active managers select specific investments based on an assessment of their worth. Therefore, rather than “owning the market”, active management aims to “beat the market.”
The principal criticism of active management is well known: it is more expensive than passive investing yet has often delivered less performance. So, when and why is active management likely to realise its full, market-beating potential?
Arguably, this should occur in periods of increased market turbulence when there is more dispersion between stock performance. We saw this happen, for example, in the wake of the dot-com bubble burst and, more recently, at the height of the COVID-19 pandemic and after last year’s market correction.
Relatedly, a further appeal of active management is that, unlike passive investing, it recognises the innate inefficiency and irrationality of markets and their participants. Such insights could be particularly useful when exploring opportunities in more specialised areas such as small and mid-cap equities, emerging markets and corporate bonds.
The view on active
Passive funds have revolutionalised financial markets and they continue to grow in popularity, yet they are not a cure-all solution. In times of market volatility and when exploring areas that require specialised knowledge, active management has a key role to play in portfolios. Investors should capitalise on what’s best from both worlds, say David Aujla, Multi Asset Fund Manager and Fabio Faltoni, Multi Asset Product Director.
“It can be advantageous to invest passively where there is an implementation or cost advantage and actively in less efficient markets where there tends to be more scope to make a difference in performance”
active and passive investment styles; an old-age and perhaps controversial debate, as proponents on each side are equally convinced that their approach is superior. While tempting to make an ‘all-or-nothing’ active vs passive decision, we believe investors should explore the possibility of combining both approaches, thus allowing their portfolios to benefit from the advantages that each have to offer.
Ben Gutteridge, Portfolio Manager - Multi-Asset Strategies
“A ‘value for money’ assessment should sit alongside any nominal fee analysis”
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No MPS charge OCFs from 0.50% Team has 70+ individuals, 20+ years average investment experience, £70bn+ AUM 4 external risk raters Available on 9 platforms
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Quick facts
12.0%
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Figure 1. The CMA for FTSE 100 has tracked realised forward returns closely
Source: Invesco as of 30 June 2023. For illustrative purposes only
CMA 10Y Return
Realised 10Y Forward Return
The dominant elements of the Invesco Investment Solutions team’s asset allocation approach are strategic in nature, meaning our focus is on building portfolios that, for a given level of risk, offer clients the best possible long-term rewards. At the heart of this process is the research effort, executed in a scientific manner by a deep pool of highly skilled analysts. Their chief ambition is to calculate Invesco’s proprietary Capital Market Assumptions (CMAs), which reveal our long-term return forecasts for the various asset classes (which at times have shown strong correlation with actual market performance, as demonstrated by figure 1), as well as ascribing a level of risk and measure of correlation. It is these CMAs that drive the implementation of asset allocation and allow Invesco to construct portfolios in an optimal fashion.
Though the forensic approach taken to calculate the CMAs adds a layer of complexity to the process, the framework is remarkably simple. Specifically, the calculations are anchored to long-term data sets, such as 10-year earnings forecasts, or 10-year average volatility measures. Indeed, it is this long-term emphasis that results in short-term market activity, such as near-term earnings disappointments or spikes in volatility, having only a modest impact on the CMAs. Such ‘stability’ in the CMAs, therefore, means asset allocation changes have been relatively minor at each update.
Whilst ‘ever-changing’ market conditions can lure investors into acting, or even ‘wanting to be seen to be acting’, such activity can often be driven by emotion rather than fundamentals. To help moderate this risk, our emphasis on strategic decision making removes much of the noise of day-to-day sensationalism, keeping portfolios more closely aligned to clients’ long-term objectives.
Q
What is your approach to asset allocation and how does this evolve in an environment of ever-changing risk?
Invesco’s fund selection approach is a concentrated effort, seeking to find high-conviction ideas across a range of asset classes, geographies and styles. It is our ambition to know a relatively small number of funds extremely well, rather than knowing less about more funds.
The first stage of the process is universe construction, defining and populating multiple bespoke categories of funds. This administrative procedure lets us conduct the fairest possible analysis between funds, but also more cleanly supports the portfolio construction stage of the process.
The second stage is heavily quantitative, distilling a shortlist of funds from the bespoke categories for further research. The quantitative factors utilised varies with each category, as does their emphasis, but common elements include risk-adjusted returns, manager tenure, fund size and flow, upside and downside capture, active share and style drift.
In the final stage of the process, we seek an audience with the fund management team, hoping to gain a deeper understanding of the philosophy and process. Engaging with fund managers and challenging their investment strategy in different market environments can help build a degree of confidence in how the mandate may navigate similar conditions in the future. Meeting management can also prove helpful in determining how the fund seeks alpha generation, and whether such ambitions chime with past success – offering some insight into whether past achievements might be repeatable.
Should a fund succeed in making it into the Invesco MPS it is subject to a rigorous maintenance and review process, with a particularly keen eye on unexpected and outsized performance, personnel changes, AUM volatility and style drift. We should add, however, such is the level of due diligence undertaken in the selection process, that a relatively high bar is set for changes. This long-term approach to fund selection dovetails neatly with the asset allocation philosophy.
Your fund selection process of three distinct steps, what are they and what do they emphasise?
The Invesco MPS portfolio construction process pays very close attention to the overall pricing of its service, knowing that costs are a material hurdle for a client’s investment performance to overcome. On that basis, Invesco find passive vehicles an extremely useful component within our ‘toolkit’; though cost is not the only determinant in allocating to passive investments. Lower conviction in active management from certain areas, such as US equities, can encourage passive adoption, as can the need for more targeted investment exposure. Within the fixed income sphere, for example, it has historically been difficult to find active fund managers who own lots of long-dated bonds or ‘long-duration’ assets. Given this shortfall, investing in a passive fixed income vehicle which structurally secures benchmark levels of duration might be a necessary step for risk management purposes. In practice, therefore, core passive fixed income strategies might better help portfolios hedge against negative growth and deflationary shocks relative to those holding only actively managed bond funds.
Within Invesco’s MPS, therefore, the passive allocations are primarily determined by our holistic approach to investment, prioritising ‘client investment experience’ and ‘value for money’ over simply ‘cost’. Despite this layered approach, however, there is consistency in decision making across portfolios, meaning some rules of thumb have merit. Specifically, we would suggest a 20% allocation to passive vehicles is a reasonable proximation, covering all major asset classes beyond less liquid parts of the equity and bond markets.
Price pressure is a factor driving flow and the increased use of passive instruments in MPS, how do you balance allocation to active and passive given this trend?
It would appear those selecting an MPS partner have a rich array of choice. What is more, the level of competition should yield further gains for clients in years to come, given the pricing and innovation pressures these conditions foster. Such choice, however, can also give rise to indecision, so we would encourage investment decision makers to focus on a handful of key metrics:
Availability: The breadth of platform availability should offer some steer on the current and future utility of the MPS service.
Price: A ‘value for money’ assessment should sit alongside any nominal fee analysis. Does the MPS management fee seem fair? Are the costs of the underlying funds reasonable? Does the performance and service inform good ‘value for money’?
Investment excellence: Experience should form the centrepiece of any analysis with potential MPS partners. Does the offering party showcase sufficient breadth and depth in their investment capability and does this resource support decision making that aligns with the philosophy of the MPS?
Returns: Performance analysis should reflect several metrics, including returns achieved relative to any stated benchmark or peers, but also risk metrics and whether any volatility targets have been met. Time horizons selected to conduct such analysis are also crucial in this exercise and should be reflective of the ambitions of the client.
Service: Support analysis may come later in the due diligence process, given the natural inclination to first look at price and performance. Invesco believe service should carry an equal weight in determining any final decision. Performance and process tells only part of the story – absent a coherent articulation of what is going on in portfolios and why, it is very difficult to gain sufficient understanding of portfolios. Without such insights it would be very difficult to host genuinely engaging meetings with clients.
What factors should advisers consider when choosing an MPS?
A long-term view dovetails with an enduring approach to fund selection
Strategic decision making helps remove much of the noise and day-to-day sensationalism within investment, keeping portfolios more closely aligned to clients’ long-term objectives, says Ben Gutteridge, Portfolio Manager - Multi Asset Strategies, Invesco. He also discusses how this approach complements Invesco's fund selection efforts; and why finding a balance between passive and active is key amid pricing pressures.
Q&A
with...
Ben Gutteridge
“Whilst ‘ever-changing’ market conditions can lure investors into acting, or even ‘wanting to be seen to be acting’, such activity can often be driven by emotion rather than fundamentals”
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients in the UK and is not for consumer use. All information as at 30 June 2023 and sourced by Invesco,unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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LGIM is the investment management arm of Legal & General Group, with a heritage dating back to 1836. And today, we are one of the UK’s leading investment management companies, trusted by investors to manage over £1.2 trillion across a range of asset classes and different investment strategies. LGIM’s size means we can also find efficiencies in the costs we pay for managing the funds and then pass these savings to you.
t the heart of LGIM’s discretionary investment service is a range of model portfolios, designed to meet the needs of a wide range of investors.
The portfolio managers have designed each portfolio with a particular risk profile in mind and aim to always keep each portfolio’s risk within those set parameters.
1. Suitability - Find the portfolio that may be appropriate to your needs
LGIM’s MPS offers growth, income and ESG ranges, investing across both active and passive building blocks. These portfolios are split into growth and income strategies with a wide choice of risk profiles.
The model portfolios are managed by LGIM’s award winning multi-asset team, who have built this service on the five pillars of multi-asset investing to help LGIM deliver your objectives:
The team understands the advantages of diversification within its model portfolios. This means the portfolio managers don’t put all your money in just one type of investment or market. Holding different types of investments across a variety of asset classes helps to spread risk. Choosing a better mix of asset classes does make more of a difference to returns and risk than merely selecting the best individual investments in a particular asset class.
2. Diversification - Spreading the risk
The portfolios are multi-asset - this means they invest across a variety of investment types, from bonds and commercial property to shares in companies traded on UK and international markets.
The portfolio managers review all the portfolios regularly and adjusts them when our views on the markets change, aiming to maximise results within your risk appetite. Our expert team undertakes regular rigorous research across global financial markets to find new investment opportunities managed both in-house and externally, aiming to deliver strong returns whilst mitigating any potential adverse risks within your portfolio. We have extensive experience in third party fund manager research and regularly monitor all LGIM and external (non-LGIM) funds the portfolios invest in to ensure that they are in line with expectations. The portfolios are managed using a truly team-based approach. Fund managers James Giblin and Francis Chua work with a team of 35 investment professionals, including economists, strategists and fund managers who look after over £74 billion in multi-asset funds. This team perform regular reviews and rebalances of the model portfolios to ensure your investments are performing in line with expectations whilst additionally leveraging Legal & General Investment Management’s proprietary macro-economic research and cost-effective access to investments.
3. Expertise - Active investment management
These portfolios have access to LGIM’s low-cost index funds to keep the overall charges low, while still satisfying overall diversification within each portfolio. We also ensure that the overall cost of the portfolio is managed to ensure that you benefit from a cost-effective approach to long term investing.
4. Cost-effectiveness - Minimising costs and passing the savings onto you
5. Engagement - Seeking positive change
LGIM’s Model Portfolio Service
LGIM’s MPS consists of 25 model portfolios with growth, income and ESG ranges, investing across both active and passive building blocks. These portfolios are split into two overarching strategies of growth and income.
Key Characteristics of MPS
LGIM’s 21 growth model portfolios are designed to help investors looking to grow their capital over time, with a wide choice of risk profiles. These portfolios may be appropriate for those looking to leave their money to accumulate, rather than regularly withdrawing income from their investment pot. For each risk profile there is a choice of three low-cost portfolios covering index, blended (a combination of index and active building blocks) and ESG model portfolios
1. LGIM internal data as at 31 December 2022. The AUM disclosed aggregates the assets managed by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong. The AUM includes the value of securities and derivatives positions. Remember the value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested.
2. LGIM internal data as at 31 December 2022
What our Index, Blended and ESG model portfolios invest in
LGIM’s 4 income-focused portfolios are similarly diversified as the growth model portfolios and hold a mix of investments. The income model portfolios are managed to four risk profiles. Unlike some income-focused portfolios, we believe in aiming to grow capital as well as delivering income. This helps make sure that the level of income your clients receive is sustainable over time and their pot will last for longer. The portfolios hold a balance of underlying funds which typically offer income, as well as those with the potential for capital growth.
What our Income model portfolios invest in
We offer bespoke model portfolios as part of our service. We are happy to discuss this with anyone who is interested. We have the flexibility for advisers to invest into our standard MPS portfolios and then move to bespoke portfolios over time, for example phasing end investors into a bespoke decumulation strategy.
Source: LGIM. For Illustrative purposes only.
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients in the UK and is not for consumer use. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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James Giblin, Fund Manager
Our model portfolios are built on five key pillars of multi-asset investing, one of which is diversification. We believe that diversification is fundamental for multi-asset portfolios as blending different assets together in a diversified manner can improve the overall risk/return characteristic of portfolios. Diversification spreads out investment exposures, which we think helps to reduce the chance of particularly negative outcomes. By reducing the large swings in returns (both downsides and upsides), we think the investment journey can be less volatile than with a concentrated portfolio, thereby allowing portfolios to compound returns over the long term in a more balanced way.
Diversified at every step of the investment process
“In our view, the benefits of asset allocation are not purely around taking advantages of market opportunities, but also to ensure that portfolios remain adequately diversified as asset class correlations evolve”
Francis Chua / James Giblin
Diversification spreads out investment exposures, which helps to reduce the chance of particularly negative outcomes; additionally, rebalancing of portfolios is a requirement as the investment landscape changes, explain Francis Chua, Fund Manager and James Giblin, Fund Manager, LGIM. They say that active asset allocation is necessary to protect the diversification of portfolios and capture potential opportunities within various market environments. They believe that the team’s ability to take an institutional approach and use it for asset allocation sets them apart from their peers.
Why is diversification a key principle for the models and how is this applied within the models?
Another key principle of our model portfolios is active asset allocation. Our dynamic asset allocation is a result of collaboration within our over 40-strong Asset Allocation team, comprising investment strategists, economists and fund managers. The team has on average 13 years of industry experience and manages more than £70 billion in assets (source: LGIM as at 30 June 2023), so our model portfolios benefit from their input and expertise.
How does active asset allocation balance the evolving nature of markets along with manage unintended concentrated risks?
We believe that our ability to take an institutional approach and use it for asset allocation also sets us apart from many of our peers, especially due to the size, breadth and experience of our team.
Francis Chua, Fund Manager
“We believe our diversified approach to asset allocation can avoid significant swings in portfolios returns, leading to a less volatile investment journey without having to sacrifice expected returns”
With a range of versions available in the marketplace for ESG portfolios, how does LGIM’s ESG compare with others?
Our Future World index funds don’t just use a negative screening process, they are also ‘tilted’, whereby their weightings are adjusted according to our proprietary LGIM ESG scores. We believe our approach emphasises the importance of integrating ESG considerations into the investment process.
We provide a full range of ESG risk-targeted model portfolios, leveraging the expertise of LGIM's award-winning Investment Stewardship team.
We diversify in every step of our investment process. This starts with our strategic asset allocation, which is where we design the long-term weights of our portfolios. The strategic asset allocation for each portfolio aims to be diversified by asset class and also by sub-asset class. For example, we would look to diversify by types of fixed income assets as opposed to just holding UK gilts or investment grade credit.
While the potential benefits of diversification are well understood, what is less known is the ongoing requirement to keep the portfolios diversified as the investment landscape evolves. As market and economic conditions change, we aim to protect our portfolios’ diversification through regular rebalances. Using our dynamic asset allocation process, we make adjustment to asset classes to reflect the market condition at the time. Finally, diversification is a key consideration when we select actively-managed funds for our portfolios, as we aim to create a balanced holding of active fund. We do this through the lens of factors where we aim to invest in funds that result in a diversified exposure to factors such as value, quality, size and low volatility.
In our view, active asset allocation is necessary to both protect the diversification of portfolios as well as capture potential opportunities within various market environments. For example, in February 2023, we reduced our exposure to investment grade credit as spreads were tight, particularly against the recessionary backdrop. As spreads widened over the course of the following few months, we added back exposure to the asset class. By dynamically adjusting the portfolios, we protected them against a tail risk scenario in credit and added value by selling when the asset class was expensive and purchasing when it became cheaper.
Concentration risks are also an important consideration for our portfolios. Our diversification efforts also extend to return drivers. For example, we keep a close eye on the concentration risk in US equities. The top five stocks make up around 25% of the S&P 500 Index (30 June 2023) but more importantly, seven stocks explain more than 70% of the index’s return (over the first six months to 30 June 2023). Understanding these concentration risks means we can make adjustments to our portfolios’ asset allocation to defend against these.
Providing good value for investors is at the core of LGIM’s philosophy and also forms one of our five investing pillars. Therefore, we are proud to offer for our model portfolio service for a 0.06% AMC.
However, we believe it’s not just about the headline cost and therefore also aware of total fees that are passed onto investors via the funds held within the portfolio. As such, we set a high bar when allocating to active funds within our portfolios, as well as offering low-cost index portfolios.
Actively managed funds must pass several tests before they are added to our portfolios. First, they must invest in a less efficient market where we believe an active fund can generate alpha. As such, we have less exposure to active funds in the most well covered and efficient markets. Second, we must be satisfied that the fund manager has a clear advantage in terms of their expertise justifies their active management fee. Finally, for equity funds, they must exhibit a factor bias to either quality, value, low volatility, size or a combination of the four. While these are factors that have proven to outperform over the long run, we appreciate that they will not in all environments, which is why we vary our allocations depending on the macro environment at the time.
We will only invest in an actively managed fund when it has passed these tests and charge an appropriate fee. Otherwise, we will typically look to add low-cost beta exposure via passive funds. We believe our disciplined approach to costs helps our portfolios to perform over the long term.
Why is cost-effectiveness an important consideration for the models and how is this applied?
For our ESG model portfolios, we invest in our LGIM Future World funds – our ESG-enhanced passive index funds - and third party, actively managed ESG funds. We believe this approach allows us to create well-balanced solutions that avoids over concentration in certain categories or styles, while maintaining an appropriate level of exposure to more specialist ESG themes via third party active funds.
We believe our active ownership approach to engaging with companies to improve on ESG issues is essential to deliver long-term, systemic change on a global scale. We take a pragmatic approach to engagement, and recognise that change is a journey that is typically delivered in steps not leaps. We therefore aim to engage constructively with companies and policymakers to push for real-world outcomes, examples of these engagements are contained within our latest active ownership report. Those who do not engage, or take heed of our drive for minimum standards, will find that we will use the range of stewardship tools to influence a better ESG outcome, including voting against specific resolutions or withholding investment while continuing to engage.
Key risks The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not a guide to future performance. Important information The information in this document is for professional investors and their advisers only. This document is for information purposes only and we are not soliciting any action based on it. The information in this document is not an offer or recommendation to buy or sell securities or pursue a particular investment strategy and it does not constitute investment, legal or tax advice. Any investment decisions taken by you should be based on your own analysis and judgment (and/or that of your professional advisors) and not in reliance on us or the Information. This document does not explain all of the risks involved in investing in the fund. No decision to invest in the fund should be made without first reviewing the prospectus, key investor information document and latest report and accounts for the fund, which can be obtained from https://fundcentres.lgim.com/. This document has been prepared by Legal & General Investment Management Limited and/or their affiliates (‘Legal & General’, ‘we’ or ‘us’). The information in this document is the property and/or confidential information of Legal & General and may not be reproduced in whole or in part or distributed or disclosed by you to any other person without the prior written consent of Legal & General. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this document. The information and views expressed in this document are believed to be accurate and complete as at the date of publication, but they should not be relied upon and may be subject to change without notice. We are under no obligation to update or amend the information in this document. Where this document contains third party data, we cannot guarantee the accuracy, completeness or reliability of such data and we accept no responsibility or liability whatsoever in respect of such data. This financial promotion is issued by Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272. Legal and General Assurance (Pensions Management) Limited. Registered in England and Wales No. 01006112. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, No. 202202. LGIM Real Assets (Operator) Limited. Registered in England and Wales, No. 05522016. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 447041. Please note that while LGIM Real Assets (Operator) Limited is regulated by the Financial Conduct Authority, it may conduct certain activities that are unregulated. Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No. 01009418. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119273. © 2023 Legal & General Investment Management Limited, authorised and regulated by the Financial Conduct Authority, No. 119272. Registered in England and Wales No. 02091894 with registered office at One Coleman Street, London, EC2R 5AA.
Unsurprisingly, providing such an explanation requires a great deal of detail on numerous areas. When it came to investments, the firm was asked to confirm whether it had a centralised investment proposition CIP and, if so, to detail:
his was the question recently posed by an FCA supervisor to a financial advice firm.
“Please provide an explanation of how you intend to meet our new Consumer Duty.”
all of the portfolios/funds within the CIP any portfolios/funds that had been added/removed in the last 12 months (and why) the governance arrangements in place to provide ongoing oversight of the CIP the minutes for the last 12 months meetings covering each portfolio/fund.
If you run an advice firm with a CIP, this points to only two options. Either you have a highly disciplined, well-resourced, in-house CIP with appropriate fund research capabilities; or you outsource your CIP – typically to a discretionary manager or a multi-asset investment solution.
T
If it’s the former, it’s past time for you to re-assess your CIP to ensure it meets the new Consumer Duty. If it’s the latter, you need to think about whether the outsourced solution delivers the good outcomes to your clients expected as part of the Consumer Duty.
Clearly, each of your clients have their own unique, financial needs. This means a robust investment solution is one designed to support each client’s individual financial plan. There should be no ‘one-size-fits-all’ CIP. Therefore, you should consider, and have appropriate provision, as to whether:
1) Your clients’ needs
“Each of your clients have their own unique, financial needs. This means a robust investment solution is one designed to support each client’s individual financial plan. There should be no ‘one-size-fits-all’ CIP”
If you outsource your centralised investment proposition (CIP) then you need to think about whether it delivers the good outcomes to your clients expected as part of the Consumer Duty, says Andy Miller, Lead Investment Director at Quilter. Each of your clients have their own unique financial needs and that means there should be no ‘one-size-fits-all’ CIP.
• • • •
Here are some areas you may wish to consider:
the solution is managed to a level of risk that’s appropriate for your client the solution meets your client’s income or capital growth requirements the investment style or price point is appropriate for your client the solution aligns to your client’s views on the environmental or social effects of investing.
The FCA states that under the Consumer Duty, ‘low prices do not always mean fair value’. Fair value is an assessment of two things:
2) Finding fair value
It’s very important that your client understands the ‘intentionality’ of their investment; namely what the investment is designed to do from a risk, return, cost, and (if appropriate) responsible investing perspective.
3) Effective, timely, and properly-informed
This means it’s important that any investment solution provides the right information to support these conversations with your client.
Finally, it’s vital that your clients are supported throughout their investment journey. That means ensuring that regular investment updates are sent, and that regular reviews are carried out to ensure any investment solution remains appropriate for each client’s changing needs.
How you go about carrying out such an assessment isn’t always easy; the good news is that investment providers such as Quilter are already required to report and publish on many of these details. For our WealthSelect Managed Portfolio Service, we provide detailed target market information and we’ve recently updated our assessment of value.
4) Ongoing services
£11.5bn
2,100
80,000
of assets under management
financial adviser firms
investors and their families
WealthSelect has become a market-leading investment proposition because of the high quality ongoing services it provides. WealthSelect also scores highly in terms of providing good value to its target market through very competitive pricing and meeting investors’ expectations, delivering on its objectives thanks to its consistent long-term track record of relative outperformance.
With a broad spectrum of portfolios available, WealthSelect provides a range of risk and price points, alongside a wealth of responsible investment options. This ensures that investors can always find a solution that, you can demonstrate, is appropriate to their needs.
WealthSelect
For further information on WealthSelect and the value it can deliver to you and your clients, please click here.
Source: Quilter as at 30 June 2023.
Are costs proportionate to the benefits provided? Are your client’s performance expectations being met?
• •
Andy Miller, Lead Investment Director
In this new outcome-based era of advice, there’s no room for one-size-fits-all solutions. In order to offer a solution that’s the best fit for each individual customer and their changing needs over the years, an MPS needs to offer a broad range of easily understood risk levels and the ability to move freely up and down the risk ladder as needs dictate.
From our perspective, the primary characteristic advisers need to look for in a managed portfolio service (MPS), is choice.
It also needs to offer a choice of investment styles, both active and passive, or a blend of the two, and a range of different pricing points to optimise customer choice.
Likewise, a modern MPS needs to offer a range of well-defined responsible investment options.
Staying relevant
Alongside all this, an MPS needs to offer user-friendly, intuitive online tools that advisers can easily integrate into their advice process.
The last element is a compelling performance track record; one that advisers can illustrate to their clients as having delivered consistently strong performance in both rising and falling markets.
We think a good MPS should actually empower advisers by giving them the range of tools, investment styles, and pricing options to help their clients at every stage of the investment journey.
“A good MPS should empower advisers by giving them the range of tools, investment styles, and pricing options to help their clients at every stage of the investment journey”
Andy Miller / Stuart Clark
Andy Miller, Lead Investment Director at Quilter, looks at some of the key considerations for advisers when choosing a managed portfolio service for their clients.
What are some of the challenges facing advisers when it comes to selecting a managed portfolio service and how does Quilter’s WealthSelect Managed Portfolio Service address these?
We recognised early on that in order to make our MPS offering a fully integrated investment solution for advisers, we needed to provide a suite of online tools. The challenge has always been to make our tools sufficiently intuitive and user-friendly that they become a ‘go to’ service for advisers that empowers them during the advice process.
There are now 56 WealthSelect portfolios spanning a broad range of risk levels and pricing points alongside responsible and sustainable investment solutions. How do you help advisers to match their clients to the right portfolio?
The Quilter Client Profiler is designed to help advisers guide their clients to the most suitable outcome for their individual needs and can be tailored to the needs of each individual adviser business. It allows advisers to produce co-branded investor profiles for every client based on four key areas of client research: their appetite for risk; their preferred investment management style; their investment needs; and their views on responsible investment.
Next, the Quilter Solutions Explorer assesses the compatibility of a range of Quilter solutions based on the information contained in each unique investment profile.
The Quilter Solutions Explorer provides an overview of each portfolio’s objective, performance data and charting, asset allocation, and a summary of each portfolio’s responsible investment profile.
By making our tools an integrated extension of of their investment process that advisers use every day, we’ve taken a lot of the time, administration, and regulatory risk out of the equation, and this is reflected in the quality of the outcomes they deliver for their clients.
“The challenge has always been to make our tools sufficiently intuitive and user-friendly that they become a ‘go to’ service for advisers that empowers them during the advice process”
The WealthSelect Responsible Portfolios are designed for investors who are concerned about the environmental and social effects of the activities of the companies in which they invest. Such investors wish this to be considered when investment decisions are being made and they want to see their capital being managed by fund managers who are leaders in the integration of environmental and social factors.
What differentiates your sustainable and responsible portfolios from one another and how do advisers decide between them?
For this reason, the portfolios commit to remaining at least 50% invested in specialist funds that pursue explicit environmental or social targets. A typical concern for many clients is climate change, so the portfolios also aim to have reduced carbon emissions relative to the MSCI ACWI Index. The Responsible Portfolios are available with active, blend, and passive investment approaches.
By contrast, the WealthSelect Sustainable Portfolios are designed for investors who want to see their capital go one stage further by seeking to target positive environmental and social outcomes.
The Sustainable Portfolios are measured against a series of sustainable outcomes, which are mapped against the UN Sustainable Development Goals, and actively exclude, or minimise, unsustainable activities such as tobacco production and fossil fuel generation. At the moment, these positive outcomes are best targeted by active managers – hence our Sustainable Portfolios are only available in an active investment style, diversified across the familiar eight risk bands.
In addition to regular portfolio reporting, all investors in our Responsible and Sustainable Portfolios also receive quarterly responsible investment reports that outline how each portfolio is measuring up to its stated responsible or sustainable investment objective and provide an update on our responsible investment activity.
The starting point for our process is a proprietary, strategic asset allocation model that will meet the objective set out with our clients. We update this on an annual basis to account for changes in assumptions and any additional work that has been undertaken on asset classes or information that we feel can improve the risk-adjusted returns for those clients.
Stuart Clark, WealthSelect portfolio manager, on his approach to asset allocation and avoiding style or market cap bias…
From there we will overlay our tactical views that have a shorter time horizon, where we believe we can further improve outcomes for clients. The final step in this process, although not asset allocation-driven, is to overlay our manager research calls to best implement our views through active, appropriate, passive funds.
While the strategic asset allocation model does not target any style or market cap bias, the decisions made at the tactical asset allocation, and therefore manager implementation stage, explicitly do. We look to avoid unintended or overly-concentrated factor exposure in the portfolio construction phase.
In our Managed Portfolios, we invest predominantly via sub-advised mandates with leading investment managers and this gives us far greater real-time information about the underlying holdings in the portfolios. This also allows us to drill down into key allocations and to monitor our total style and market cap exposures. From there, we use our underlying manager mix to help us adjust these factors, either at our quarterly portfolio rebalances or as part of the ad hoc rebalances we undertake.
Availability: The breadth of platform availability should offer some steer on the current and future utility of the MPS service. Price: A ‘value for money’ assessment should sit alongside any nominal fee analysis. Does the MPS management fee seem fair? Are the costs of the underlying funds reasonable? Does the performance and service inform good ‘value for money’? Investment excellence: Experience should form the centrepiece of any analysis with potential MPS partners. Does the offering party showcase sufficient breadth and depth in their investment capability and does this resource support decision making that aligns with the philosophy of the MPS? Returns: Performance analysis should reflect several metrics, including returns achieved relative to any stated benchmark or peers, but also risk metrics and whether any volatility targets have been met. Time horizons selected to conduct such analysis are also crucial in this exercise and should be reflective of the ambitions of the client. Service: Support analysis may come later in the due diligence process, given the natural inclination to first look at price and performance. Invesco believe service should carry an equal weight in determining any final decision. Performance and process tells only part of the story – absent a coherent articulation of what is going on in portfolios and why, it is very difficult to gain sufficient understanding of portfolios. Without such insights it would be very difficult to host genuinely engaging meetings with clients. Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This content is for Professional Clients only and is not for consumer use. All information as at 30 June 2023 and sourced by Invesco, unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
But what is an alternative asset exactly? There are several key characteristics that define these types of assets:
ontinued volatility across equity and bond markets has led to investors searching for additional asset classes or sub sectors of asset classes that can add further diversification to their portfolios. As a result, alternative assets have become a popular allocation for model portfolios. The alternative investment universe broadly includes assets which are not the traditional stocks, bonds or cash.
Alternative investments are often only available to institutional investors or high net worth individuals, due to their perceived complexity and high minimum investment requirements. Some investments, such as private assets, can be less liquid relative to traditional investments, meaning that they cannot be easily bought or sold on public markets. The risk and return profile of alternative investments is often less dependent on traditional market drivers and therefore they may follow a return journey that is less correlated to traditional investments.
C
This still covers a broad range of available assets, so let’s break it down into sub sectors. We categorise alternative assets into five key groups: Private Equity, Hedge Funds, Commodities, Real Assets and Specialised Property. Each asset has its own unique set of characteristics and associated risks. If we look at Private Equity as an example, this involves investing in companies that are not publicly traded on stock exchanges. Investors typically take an active role in the management of the companies they invest in, with the goal of improving their performance and increasing their value. The investment horizon is therefore several years and may require a high minimum investment amount.
Let’s break it down
“The purpose of adding alternatives to a portfolio is not to replace other asset classes but rather to bolster diversification”
Volatile markets require thinking outside the box and demystifying alternative investments, says Olivia Geldenhuys, Investment Director, Schroder Investment Solutions.
Less risk or sensitivity than global equities Minimising loss to a certain percentage over a given time frame Downside protection during periods of market stress Returns which are not dependent on traditional market movements A lower correlation relative to traditional asset classes
Diversification is key - strategic asset allocation for the Schroder Active Model Portfolios
Hedge Funds are another example and these include a diverse group of strategies. The method of portfolio construction and risk management technique defines the approach. Long/Short strategies are the most common type of hedge fund. The goal of this strategy is to profit from both rising and falling markets by reducing exposure to overall market movements. Fund managers buy (go long) investments they expect to increase in value and sell (go short) investments they expect to decrease in value. A long position is the traditional way of investing - buying low and selling high. A short position, on the other hand, is a more complex strategy where the fund manager borrows a security and sells it with the expectation that its price will fall in the future. If the price does fall, the fund manager can buy the security back at a lower price, return the borrowed security, and profit from the difference. It's essentially a way to profit from a decline in a securities price.
The purpose of adding alternatives to a portfolio is not to replace other asset classes but rather to bolster diversification. Understanding the type of contribution that different alternatives offer and how these can be blended to achieve a defined objective is a critical starting point. Some ways you might define the purpose of such an allocation are:
The need for true alternatives
The key characteristics which define alternative assets, and make them attractive from a diversification perspective, also make them difficult for retail investors to access. One potential solution is to invest in a portfolio that can dynamically allocate across the five key groups of alternative assets. Constructing a well diversified portfolio of alternative assets requires expertise and experience to conduct due diligence on underlying funds, assess market conditions and identify potential investment opportunities. Professional management also ensures that potential risks are identified, assessed and mitigated against. In addition, pooling resources from multiple investors can meet the higher minimum investment requirements and offer more liquidity than directly investing in alternative assets.
At Schroder Investment Solutions, alternatives are part of our strategic asset allocation for our range of model portfolios. We have a clearly defined objective where each holding is classified as a risk diversifier or return enhancer. This allows us to be more defensive or add more risk depending on our analysis of the market cycle. We lean into each strategy to balance the level of risk taken relative to the return we expect to generate. It's important to allocate to alternatives across a multi-asset solution and not think of them as a standalone investment to meet your investment goals.
Higher risk
Lower risk
Important information Marketing material for professional clients only, not for onward distribution. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Insofar as liability under relevant laws cannot be excluded, no Schroders entity accepts any liability for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise). Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy/ or on request should you not have access to this webpage. For your security, communications may be recorded or monitored. Issued in September 2023 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. UK006617.
To read our latest insights or to find out more about our range of investment solutions, click here. Alternatively, contact your usual Schroders’ representative or call our Business Development Desk on 0207 658 3894.
Source: Schroders as at April 2023. Please note that the illustration may not show our current asset allocation. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.
Olivia Geldenhuys, Investment Director
Portfolio risk profile
Access is everything
MPS is a service, so it is included under Consumer Duty requirements and providers have to produce fair value assessments, target market documents, and start to consider areas such as consumer understanding.
We were fortunate with the fair value assessment because as part of an asset management business, we've always had to produce assessments of value for our funds. So that gave us a really good framework, because the regulator hasn't actually set any specific requirements as to what a fair value assessment needs to cover.
MPS: Navigating Consumer Duty and market challenges
Consumer Duty has certainly had an impact on decisions for many advisers to start to think about outsourcing and in our most recent biannual adviser survey, we learned that 25% said that it would lead to increasing their level of outsourcing.
Many of them didn't initially appreciate that under Consumer Duty, if they were running their own advisory-based models that they would also have to do exactly what I've described in terms of fair value assessments, target market documents, and consumer understanding.
“Consumer Duty has certainly had an impact on decisions for many advisers to start to think about outsourcing and in our most recent biannual adviser survey, we learned that 25% said that it would lead to increasing their level of outsourcing”
Gillian Hepburn
A rise in volatile markets, the impact of Consumer Duty and increasing levels of regulation will see the rise in advisors outsourcing to investment experts continue to climb, says Gillian Hepburn, Head of UK Intermediary Solutions, Schroders. Hepburn also explores the three areas of that advisers should consider when choosing an MPS and why they should look very carefully at the additional services MPS providers deliver.
Can you tell us about Consumer Duty obligations for MPS users and the increased rise in outsourcing?
White labelling can mean different things to different people. We talk about it on three levels. The first is co-branding of the existing proposition. For example, on factsheets and reporting, it would be the adviser's brand sitting alongside Schroders. It's very clear to the customer that it is a partnership.
What challenges does the rise in white labeling present?
White labelling can also mean we specifically create new models on a platform with the adviser's name and brand on them, with the underlying investments still the same as our standard offering.
Finally, there are what we call tailored or bespoke models where the adviser sits on the investment committee, debates about some of the underlying investments and the portfolios might be different from the standard offering.
We're seeing lots of different models emerge. In the case of the tailored models, if advisers are genuinely outsourcing because they want access to investment expertise and they sit on the investment committee, there needs to be real clarity of the adviser's role in that process.
Furthermore, if you think about Consumer Duty outcome of consumer understanding in the context white labelling, it has to be very clear to the client that the discretionary manager is actually managing the money and therefore taking on all the regulatory responsibilities.
“Our view is that although we provide an investment service, the adviser is always in the driver’s seat with the client”
We ask this in our adviser survey and typically, there are three areas that come through: cost, performance and the investment process.
What factors should an adviser consider when selecting a DFM?
Advisers like to have an aligned process across all of their investment solutions. This is how we operate our model portfolios and our multi-asset funds. It is the same investment process and philosophy, but then packaged differently depending on the outcome that is required for the client, whether that be active, strategic index, sustainable models or a blended solution (combining active and passive investments). Cost might be another factor.
Platform availability is also important. Our models are currently on 14 different platforms but that doesn’t come without challenges. One of these challenges is: Does the platform have all the underlying investments that you need to hold within the models? That's always a factor for us. However, if an adviser speaks to us about a new platform, we're happy to go on any platform but can it actually support our proposition?
Suddenly the level of regulation is impacting their business. The obligations for advisers in terms of resources and skill sets required are quite significant and we think that that's probably one of the reasons that we're seeing this rise in outsourcing.
One the other hand, if you take Consumer Duty out of it; every time we survey advisers, we are told that we will see continued rises in outsourcing. There’s been quite a lot of volatility in the markets over the last few years and advisers say helping their clients navigate markets can be a challenge. By outsourcing to investment experts, they get access to resources that can help them with that.
This is an area that advisers should look at quite carefully. Our view is that although we provide an investment service, the adviser is always in the driver’s seat with the client. What we need to be doing is delivering timely content about performance, cost and how we are managing the models to equip them with the information to have good quality conversations with their clients.
We produce quarterly reporting and other content like sustainability reports. The latter, for example, demonstrates not just alignment to the UN Sustainable Development Goals, but also how much the investments contribute towards delivering positive impact. We have done a lot of work with advisers through thought leadership content, articles, and webinars; and these can help them think through more complicated conversations with clients. For example, we host a quarterly webinar that focuses on the market and the portfolios and it also has a heavy focus on Q&A from our adviser community.
What additional services should your MPS provider deliver?
It really comes down to not just being an investment partner but working as a business partner to advisers. It is about spending time with advisers and understanding their challenges, what they are trying to achieve, and how we can continue to improve our offering.
Justine Randall, Sales Director
Our commitment has not changed throughout our 10-year history and we remain entirely dedicated to the adviser community, offering our Tatton MPS service purely through IFA’s and on adviser chosen platforms. We are so proud of the investment management firm we have created empowering our adviser firms to access Tatton’s risk aligned portfolio’s across 21 platforms, aligned to several risk profilers and across Active, Passive, Hybrid, Ethical, Income and our most recently launched Money Market portfolios.
atton was designed with one key goal – forming partnerships with financial advisers to place them at the heart of the value chain and deliver investment excellence together. It’s incredible to look back some 10 years post our launch with over £13bn of client assets in our care from nearly 900 adviser firms and reflect on just how fast the MPS marketplace has evolved.
We knew that to change the shape of the investment landscape and build trust we needed to do 3 things:
“Our emphasis on open and transparent communication ensures that clients understand the rationale behind our decisions and fosters a sense of partnership in their financial journey”
The regulatory challenges stemming from Consumer Duty is an opportunity for advisers to represent their clients’ interests in a more robust way, says Justine Randall, Sales Director, Tatton Investment Management.
The evolution of Tatton - £13.2bn and 850 adviser firms
1) Lower the cost of investing – we did this by making our DFM fee 0.15% and bringing competitive OCF’s across our range
2) Deliver market leading investment commentary through proprietary technology – timely, relevant and market focussed investment commentary delivered through our portal and website supporting you in delivering client outcomes
3) Partner and offer a flexible service to support client segmentation and consumer duty goals – Tatton models offer choice of investment style, risk profiler alignment, platform and offer cobranded and white-labelled options – you decide how to shape our combined service and we work to your mandate.
Our commitment remains steadfast that we will never compete with you – being designed by financial advisers, the Tatton service cannot be accessed without an IFA – reassuring you that you are the cornerstone of client service and we are focussed on delivering robust and repeatable investment returns on your choice of adviser platform. This means we don’t have to support legacy infrastructure or systems costs and are able to offer competitive charges without compromising investment standards.
Back in 2013, where others saw RDR as a challenge, we saw an opportunity. Today we see Consumer Duty in the same way. Regulatory challenge brings new hurdles but increased cost disclosure and transparency of offering is an opportunity for IFAs to represent their clients’ interests in a more robust way. Supervising the overall cost of investment provides a greater degree of stewardship and creates significant bargaining power against other firms and Tatton will help you do just this.
Knowing it’s not all about cost which is why we focus on providing Investment Excellence – the perfect combination of creating returns, managing risk and controlling costs. Only by combining all three elements can we generate real sustainable returns for investors.
Portfolio returns are the most visible performance indicator but can only be achieved within an investor’s risk tolerance – we won’t compromise risk to chase returns. Similarly, we won’t compromise returns through unnecessary costs, so we try to lower the cost of investment wherever possible.
We stay within our clients’ risk parameters, manage costs, and with the quality and depth of our investment team have created a compelling combination for investors, and we believe, the ideal discretionary partner for Independent Financial Advisers.
Comparison of Tatton Core and Managed portfolios vs industry average
Tatton Core Balanced
0.35
0.25
0.15
Tatton Managed Balanced
0.5
Peer 60/40 Portfolio
Portfolio costs
Platform charges
Tatton fee
Industry average MPS fee
0.6
0.37
Tatton cost of investing including platform 0.75%
Tatton cost of investing including platform 0.90%
Industry cost of investing including platform 1.22%
Source: Tatton, NextWealth 2021
Three pillars to the business built around the needs of IFAs and their clients
Managed Portfolio Services
Cost challenger access to DFM Services
@0.15% - set the price for DFMs
•
Available across 20 platforms
Mapped to leading risk profilers
Established Tatton as the IFA’s investment manager
Tatton Funds
Simple, low-cost investment option
Broadening access across wrappers, open architecture
Robust investment process as in DFM MPS
Established Tatton as the cost-effective, multi-asset fund provider
Bespoke services
Tailored solutions for investors with specific requirements
Available on platforms for efficient trading and transparency
Tatton as a cost challenger alternative to traditional off platform bespoke
The Tatton investment team follows a clearly defined and robust investment process that draws on experience and expertise. Each investment decision is well-considered, leading to portfolios that contain a suitable blend of global assets, regions, and strategies to help meet investors’ needs.
An agnostic approach means the best of both worlds
Tatton are unconstrained investment managers, meaning that we are not limited by a particular style or provider when selecting investments. Our investment process identifies any opportunity based on the benefits it presents – we then select an investment that most closely matches it.
Our investment process combines top-down analysis and bottom-up fund selection. Top-down analysis includes a review of the macro-economic backdrop with specific reference to monetary and fiscal policy across the globe. We include an understanding of geopolitics and its influence on regional growth dynamics. Further to this, an understanding of the earnings environment, valuations, and market drivers to ultimately determine the tactical position of the investment strategies. This is combined with bottom-up fund selection, which is the researching, analysing and selecting the best funds for the overarching investment strategy.
Tatton
Passionately agnostic between active and passive, Tatton says its blend of a managed range with predominantly active funds and a tracker range with low-cost passives means advisers can find a solution that meets a specific client’s needs with consistency in approach across all strategies. The group also explains how its agnostic approach and Overlay strategy helps IFAs account for diverse and changing client specifications.
What is your investment process and where do you add value throughout this process?
Tatton was created with the adviser needs in mind – our approach has always been that the IFA should decide how they wish to engage – our role is to offer a choice of investment style, platform, risk profiler and charging structure to empower our advisers to tailor their Tatton offering for each client.
Every investor has a different risk profile, investment horizon, expectations of returns, tax planning, and these all change throughout an individual’s life. How does your agnostic approach help IFAs account for these diverse and changing specifications?
We are passionately agnostic on investment style (active vs passive funds) we have evolved our offering based on adviser feedback to include solutions for all client needs and requirements. Offering active, passive, hybrid, income, ethical and money market portfolios, we recognise that the adviser is the expert in holistic financial planning, having undertaken an initial and ongoing detailed client Fact Find - and we are ultimately the last part of the puzzle for them to meet their ongoing investment goals.
By having a solution for varying client’s needs whether it be risk, style, global diversification or sustainable preferences, we can support advisers in that holistic plan through the client’s investment journey.
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“By having a solution for varying client’s needs whether it be risk, style, global diversification or sustainable preferences, we can support advisers in that holistic plan through the client’s investment journey”
Continuing our commitment to choice - Tatton manages two strategic asset allocations – Classic and Global. Our Classic version aligns closely to the wider market asset allocation approaches with around 30% of the equity bucket holding UK equity funds and the rest of the world making up the remainder.
How do you approach asset allocation for differing clients’ needs and risk profiles?
Following IFA demand during the COVID 19 pandemic for a more diverse and globally weighted approach, we were delighted to bring our Global asset allocation to the market. Launched in 2020 the global models follow a strategic asset allocation constructed as market cap weighted equity exposure.
Tatton launched our Overlay strategy back in 2016 to enable trading efficiencies, a broader investible universe and support our fast-growing asset based on many IFA platforms. Following our continued growth of assets under management and IFA support we have now reached a size where extending the Overlay approach to more investment solutions would enable us to bring the same benefit to more clients and ensure a consistent approach across our offering.
The Overlay strategy is now present in our managed, core and tracker portfolios - representing approx. 50% holdings. In essence, the Overlay Strategy is a Fund of Funds, which is closely aligned to our individual platform holdings, however it comes with several very important additional benefits, as laid out below:
Overlay strategies have been recently rolled out to all portfolios (excluding Income and Ethical models). What is the reason behind this strategy and what are some of the benefits?
We are passionately agnostic between active and passive, have a managed range with predominantly active funds, a tracker range with low-cost passives and we then blend these to form a hybrid (core) range with the best of both. This means advisers can find a solution that meets a specific client’s needs with consistency in approach across all strategies.
The ongoing management of the investment strategies includes an investment committee meeting at least quarterly, monthly review meetings on performance and fund analysis, as well as weekly investment meetings covering, equities and fixed income markets, economic data, and any geopolitical events of note. With this significant investment oversight, it enables our investment managers to make active decisions to increase or reduce risk within portfolios and generate consistent long-term returns.
At Tatton we recognise the importance of communication, and we work closely with advisers to generate suitable client facing material, which is flexible, intuitive and frequently updated and published to help advisers provide a depth of investment service to their end clients.
Offering the two complementary asset allocations allows the adviser to make a choice for each individual client, ensuring they are not limiting their horizons based on a single asset allocation offering. Many of our advisers appreciate this choice in addition to the breadth of investment styles and blend accordingly based on individual client needs.
We can offer a choice across our Managed, Core and Tracker ranges and all risk profiles, meaning that clients with a specific focus on low-cost passives or fully active underlying funds can still have their needs met at the risk profile and style type.
The Tatton offering fits nicely into the holistic financial planning process by meeting all client’s needs and risk profiles.
Efficiency of Trading – i.e. Less time out of the market, whilst being able to put through sales and trades simultaneously. Executing short term investment themes – Ability to capture short term anomalies through tactical positioning as and when opportunities present themselves. Access to funds – For example, ETFs, which expands the investment universe for our Fund Manager team to consider and utilise where appropriate. Favourable share class costs – Due to the availability of institutional share classes and givens Tatton’s overall scale and size in the Investment market. GIAs – The trades in the Overlay proportion of the Portfolios are not realising any Capital gains for clients, extremely beneficial given new and ongoing changes in individual tax legislation.
The way we manage the money
Client
Financial goals
Adviser
Financial plan
Platform
Your chosen investment platform
Meeting client's investment goals
Your investment platform
Asset Allocation
Strategic asset weights can be altered temporarily to avoid overvalued asset classes
Fund Selection
Appropriate funds selected from investment universe based on extensive research
Rebalancing
When necessary, not just automatically
Tatton DFM Models
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Our investment approach - needs based, not time-based rebalancing
Tatton Portfolio
Equities
Alternatives
Bonds
Cash
The entire portfolio is on the client’s chosen platform with half invested directly into funds and the remainder in the Overlay Strategy. As the illustration shows, splitting the portfolio in this way allows the Overlay Strategy to provide access to funds that are not accessible on a platform and transact between them at trading efficiency levels commonplace in the institutional investment world, but not yet realisable on the retail investment platforms. We use this feature to allow us to purchase closed funds, new funds, and assets that are not cost effectively tradeable on a platform, but can be in a fund, such as Exchange Traded Funds (ETFs) - a valuable diversification tool.
Daily client valuations feed to Tatton
Tatton manages portfolio oversight, and tactical adjustments
Executes client fees to Tatton
Investment Platform Wrap
Overlay Strategy
“We are passionately agnostic on investment style (active vs passive funds) we have evolved our offering based on adviser feedback to include solutions for all client needs and requirements”
Investors are kept in the market during portfolio changes
50% allocation used to overcome platform trading variance
Allows Tatton to split trades as required to help trading costs
Fund manager rebates passed directly to clients offset AMC
Opens investment universe to seed funds, closed funds, and ETFs
Faster, more adaptative, tactical allocations
Reporting by Tatton through adviser
No separate client authorisation required
The Tatton Overlay Strategy in practice
