informersolutions - old mutual debacle in early september 2008, uk high yield bond funds fell by as...

PROTECTION

PENSIONS

INVESTMENTS

SOLUTIONS

informerfor f inancial advisers onlySeptember 2010

contributions from:

safety first? how much risk are ‘cautious’ investors really taking?

2 informer September 2010

editorial September 2010

welcome to the September 2010 edition of informer

Firstly you’ll have noticed this month’s informer has been split into two booklets. This one includes all the

usual insightful comments from Skandia experts and our fund group partners, and the second booklet includes your informer fund statistics.

We’ve made this change following feedback on how you use informer and to make it easier for you to receive the sections that you find most valuable. You might prefer to read the articles online and you will shortly find our website will include more informer articles, videos and useful resources (see overleaf ). So, if you’d like to stop receiving informer articles or fund statistics in hard copy and use the website as your preference in the future, let us know at [email protected]

so, to this month’s issue… We have themed this issue around the crucial task of meeting client expectations. We are all well aware of Treating Customers Fairly Outcomes 4 and 5 in that advice needs to be suitable, take account of client circumstances and that any resultant investment needs to perform as a client expects. But how do you ensure that’s achieved?

In the past there has been limited guidance, resulting in relatively straightforward processes which may do little more than assess an individual’s attitude to risk as ‘cautious’, ‘balanced’ or ‘aggressive’ – and then direct them to a fund or portfolio that ‘matches’ that requirement. Clearly the online functionality available through platforms has enabled you to build a comprehensive investment process more quickly and efficiently.

Ensuring that the underlying fund or funds match a client’s attitude to risk is probably the most challenging aspect of risk assessment and portfolio management. The infrastructure and tools we provide ensure you have an effective basis to consistently

execute this requirement, and starting on page 8 Mat Wood analyses the Cautious Managed sector and introduces our new Managed Fund Analyser tool which we’ve built to help you assess the volatility of managed funds and ensure they remain suitable for your clients.

It is clear that any effective process needs considerable attention and expertise. That’s why our Spectrum range has been so successful. The funds are continually rebalanced to ensure the asset allocations maintain their risk/return characteristics within a changing economic environment.

One thing that Spectrum currently doesn’t do is offer an element of protection. Overleaf, Graham Bentley looks at the options that are currently available to you and considers the types of solutions that might be of real benefit to clients, while meeting their expectations.

I hope you enjoy this issue and if you have any feedback do get in touch at [email protected]

Peter MannCEO, SkandiaUK Group

contents4 briefin¯ the latest news from Skandia

5 proceed with caution the options for protecting investments

8 cautiously mana¯in¯ expectations how cautious is ‘cautious’?

10 ¯et set, ¯o! the fast pace of change in pensions

12 cash flow is kin¯ Epoch on long-term equity investing

14 room to manoeuvre SWIP’s strategic navigation of the bond market

16 rotation, rotation, rotation Cazenove on rotating exposure between asset classes

18 strate¯ically minded Artemis Strategic Assets Fund update

September 2010 informer 3

In the next few weeks we’ll be making some improvements to the Skandia public websites for advisers and customers. We have focused on the design and navigation, and how we can make all the content you need to access easier for you to find, use and share.

Our customer website focuses on the benefits of financial advice with clear links to supporting advice sites, such as Unbiased and AIFA.

what’s new?New look: A fresh, updated design, with more space given to useful content for you and your clients. We will also sign-post relevant related content more clearly to maximise the usefulness of your visit to the site.

Clearer labelling: More prominent labelling and highlighting of different types of content, such as platform developments, legislation updates, fund news and useful literature.

Video: The site makes better use of video and images. There will be more content for you in bite-sized video formats to make it even easier for you to stay up to date on key topics.

Latest news: All of our key messages for advisers will be prominently displayed on the adviser homepage to ensure we keep you up to date.

Sharing: We will include links to allow you to more quickly and simply share useful content with colleagues, clients and on social networks.

We expect the new site to launch early in October and we’ll e-mail you to let you know when it’s there. Alternatively you can follow @skandia on Twitter for all of our latest news and developments.

briefin¯ the latest news from Skandia

new website

Our new adviser and customer public websites will launch in October 2010

a new look for skandia.co.uk

Our Knowledge Direct website brings technical financial planning support to your fingertips.

The site takes its name from ‘the knowledge’ column (see p10) in informer and provides you with all the technical financial planning material from Skandia in a single website.

The site is ‘Wiki’ style – which means it centres around the search function –

enabling you to quickly and easily find content by keywords. Alternatively you can use the filtering terms provided, such as ‘pensions’ or ‘tax and trusts’, and all the information is available in a print-ready format too.

We’re adding articles to Knowledge Direct on a regular basis along with ‘frequently asked questions’ and links to external websites and tools.

…you can access all of Skandia’s tax and financial planning support material in one place?

one more thin¯:These moves are also part of a wider update to the totality of our e-services for financial advisers and we are currently working on design and usability of our adviser extranets for 2011. Here’s a sneaky peek of the latest designs of the Skandia Investment Solutions extranet:

visit www.skandiaknowledgedirect.co.uk


T he Roman poet wrote several odes regarding a narrow escape from a falling tree. The event clearly had

a deep psychological impact on him, if not a physical one. The rest of the poem, along with others on the same subject, features a philosophical view of how, for example, sailors and soldiers may recognise risks in areas with which they are familiar, yet may fail to account for danger where they have less expertise, or where they assume no danger exists at all.

Stock markets can be dangerous places for the least-aware. To ensure clients’ aspirations are fulfilled, advisers use a variety of strategies that are centred on investing in real assets. As we said last month, Skandia supports asset allocation as the primary strategy supporting investors’ long-term portfolios. By judiciously apportioning capital across a variety of asset classes, the vagaries of price behaviour can be mitigated.

It is regarded as virtually axiomatic that bonds are less risky than equities. >>

It’s understandable that some investors expect a degree of protection with their investments. Graham Bentley considers the available options (and swaps).

“Who can hope to be safe? Who sufficiently cautious? Guard himself as he may, every moment’s an ambush…”

Horace – (65-8 BC) Ode XIII To a Tree

investments

Graham BentleyHead of Investment Marketing


There is justification for this – equities have no maturity value and have no coupon – the dividend is entirely at the discretion of the company. On the other hand, fixed income securities typically have a maturity value via a price at redemption (par) that is known in advance, along with a coupon that pays the investor interest on the amount he has lent the issuer. The price of a bond can only reference its expected cash flows – coupons and par – and the appropriate discount rate, which itself is a function of the market interest rate for comparable bonds, the rate at which interest is accumulated leading to a coupon payment, and the number of those payments. Therefore, bond prices should be relatively predictable and efficient, being less likely to deviate from expected prices. There is a formula for this – maths rules in that respect. The balance of bonds to equities is regarded as being central to the asset allocation process. Many advisers accept this with little challenge, however as Horace attested, danger lurks round every corner.

There is a second and less obvious layer of influence on fixed income price behaviour, namely price relativity (eg credit rating relative to a benchmark government bond) and, more exotically, something known as ‘rational pricing’. Rational pricing ensures that a bond is arbitrage-free, ie a trader cannot claim a risk-free profit by trading between different types of bonds with identical cash flows. Furthermore, event risk (eg the Lehman collapse) impacts

on fixed income no less keenly than for other securities; when it becomes difficult to recognise value and no one is willing to own those securities, prices can vary wildly. In the six months following the Lehman debacle in early September 2008, UK High Yield Bond funds fell by as much as 43%, while Strategic and Corporate Bond funds fared barely less badly. Subsequently through 2009 and beyond, prices have recovered very strongly, with the worst performers suddenly becoming best performers with returns in one case exceeding 100%. Of course, one shouldn’t expect those returns to continue, given we have simply seen oversold assets recovering value.

Despite the probability of similar collapses being relatively low, this does not mean we should simply accept them. There is no disgrace in seeking a level of protection from extreme market behaviour. I have the good fortune to live in a thatched property. I have taken the view that while a roaring open fire at Christmas would be a wonderful sight, the associated fire risk is not worth taking. Consequently, the risk of my house catching fire is significantly reduced. Does this mean I should ignore that low probability ‘tail-risk’? No – the consequences of a fire would be quite literally devastating. I handle that extreme risk by taking out insurance through a specialist insurer of similar properties. That insurer is a ‘counterparty’ – I pay the counterparty a premium and in

A number of these products have complex pay-out profiles, eg if the index doesn’t fall below its highest price on the last five Mondays, and a black cat crosses your path on a Sunday while it’s raining, you get 112% of the number you first thought of.

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investments


options and swaps Options are financial instruments that give the holder the right, but not the obligation, to engage in a specified financial transaction. A call option is the right to buy something (the underlying assets) at a specified price (the strike), on or before a particular date (expiration date), whereupon it becomes worthless. The cost of the option (premium) is significantly less than that of the underlying assets, allowing exposure to price changes much more cheaply than buying the underlying asset itself (I don’t pay the cost of the house to insure it). The holder of a call option hopes the price of the underlying asset rises above the strike price (goes ‘in the money’) before the expiration date, otherwise he has lost the premium. The return on a call option then is effectively a reward for a rise in the price of the underlying asset. A put option is precisely the opposite – the right to sell the underlying asset at the strike price, on or before expiry. I pay a premium, in exchange for reward if the price falls. Options are for the most part traded on an exchange and are very liquid. The underlying assets could be an index, or shares in a particular company, or a mixture of indices, and so on. Put options, for obvious reasons, are important instruments where the protection of investment values is paramount.

Swaps are, as the name implies, exchanges of cash flows between two counterparties. Total return swaps are much used in building protection strategies. An investment bank pays the total return on the underlying assets to the counterparty, eg fund group. Meanwhile, the fund group makes periodic interest payments, eg LIBOR, to the investment bank. The total return is the capital gain or loss, plus any interest or dividend payments. If the total return is negative, then the bank receives this amount from the fund group. Both parties have exposure to the return of the underlying stock or index, without actually having to hold the underlying assets. The profit or loss of the fund group is the same for them as actually owning the underlying asset.

return they promise to pay a sum sufficient to rebuild the house. I get the original ‘capital’ back, right down to the daub walls and ships’ beams, along with the additional investments we’ve made in it. I have peace of mind.

There is no reason why similar ‘insurance’ cannot be used to protect (not guarantee) an investment. All that is required is an insurer or counterparty of sufficient financial standing who is happy to accept that risk, in exchange for a premium. The mechanics may be different, but the principles are the same. The tools that financial ‘engineers’ use to create these insurance arrangements are derivatives, ie instruments derived from some other security or basket of assets, known as the ‘underlying’ funds or assets. The basic derivatives we need to pay attention to for now are options and swaps. These terms may carry exotic connotations, but they are, at the basic level, relatively simple (see panel).

Investment banks use these structures to create strategies that reward the investor in a particular set of circumstances. These strategies can be incorporated into product structures so as to replicate portfolio behaviour while protecting downside, to varying degrees. A number of these products have complex pay-out profiles, eg if the index doesn’t fall below its highest price on the last five Mondays, and a black cat crosses your path on a Sunday while it’s

raining, you get 112% of the number you first thought of. These structures are commonly offered by banks – they appear to be enhanced cash with a modicum of stock market risk, and have limited terms, eg five years. Other funds profess to move from risky assets to cash and back as markets move around, but these can be expensive and have a propensity to fall into ‘cash-lock’ – a 100% exposure to cash in bear markets where an investor ceases to participate in any subsequent recovery. These funds then have to close and hand back capital to disappointed investors.

What investors need is an open-ended fund that is open to all, relatively low-risk, yet has downside protection that rises over time for all investors, whenever they bought. It should have daily dealing with no entry or exit restrictions, and no maturity date. It should not be able to cash-lock.

In other words, imagine a protected Spectrum fund… more next month!

In next month’s informer Graham Bentley will continue to explore options for capital protection and introduce an innovative new solution from Skandia.


Mat WoodInvestment Marketing Manager

‘Attentive to examine probable effects and consequences of acts with a view to avoid danger or misfortune.’

This is a definition of ‘cautious’ according to Webster’s Revised Unabridged Dictionary (1913). I’m

not sure it helps me all that much. Am I considered cautious because I always carry a spare parachute when I go sky-diving or am I considered cautious because I won’t jump off a chair let alone out of an aeroplane? Clearly as an adjective it depends on the noun but if the noun is ‘investor’ does ‘cautious’ say enough? The degree to which an investor may feel they are cautious is completely subjective.

what is cautious?The Cautious Managed sector was created just over 11 years ago in April 1999 emerging out of what was then the AUTIF Managed sector. Of the inaugural 23 funds, 18 still survive today*. Clearly, managed funds have been around for much longer than 11 years (Aviva Distribution Fund launched in 1974) and today you can choose from a range of 155 funds that qualify as cautious#. That’s 155 funds ‘…investing in a range of assets with maximum equity exposure restricted to 60% of the fund and with at

least 30% invested in fixed interest and cash’ according to the IMA definition. To put it another way it is 155 funds that may expose up to 60% of a client’s portfolio to an atmosphere where parachutes are less effective.

Arguably, some of the more effective parachutes may be found in the IMA Protected sector, but the ride might be less exhilarating. These days not all cautious funds confine their objectives to the 60/30 rule alone and over the years we have seen increasing numbers of multi-asset, defensive and absolute return funds swelling the ranks of the Cautious Managed sector. In fact since 1999, the number of funds categorised as cautious has increased 574% (interestingly the corresponding figures for Active and Balanced are 79% and 70% respectively).

Don’t get me wrong, I think the IMA categories are very helpful (as are the ladies working there who helped with some of the historical background). They are essential if advisers and investors are to narrow the massive universe of investment funds available for comparison and selection purposes. I am certain the Cautious Managed sector will live long enough to see its 20th anniversary but I do expect the

constituent funds will change. My overriding concern is regulation based and specifically related to the FSA’s Treating Customers Fairly Outcome 5:

Consumers are provided with products that perform as firms have led them to expect and the associated service is both of an acceptable standard and as they have been led to expect.

A small sample I know, but let’s consider that range of 18 funds from which I might have chosen to invest my ISA monies those 11 years ago. If I had chosen well, I might have seen a return of 85.93%^; if I had chosen or been advised poorly I would have seen 5.83%^ and if I had left the money in the bank, I could have seen a return 35.11%^. Clearly I might have been better off in cash but you may be forgiving in nature and taken heart from the fact that, inflation aside, even the worst case scenario didn’t see me lose money. Now I don’t think for a minute an investor would be happy with the worst case scenario but then performance is only part of story. These total return figures are a snapshot of the return after roughly 11 years, but how much ‘caution’ was there on the journey? Was my investment jumping from chairs or aeroplanes? Using volatility as a measure of caution, those 18 funds delivered

Mat Wood explains why caution is needed when investing in Cautious Managed funds to ensure successful client outcomes.

funds

mana¯in¯expectations


How much ‘caution’ was there on the journey? Was my investment jumping from chairs or aeroplanes?

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returns while experiencing volatility ranging from 6.11 to 16.66. Over the same period the FTSE 100 experienced volatility of 15.12. Isn’t it amazing that a fund with a maximum exposure of 60% equity experienced greater volatility than an index consisting of 100% equity?

risk vs returnOf course, we all know the power of statistics and the sample size in this example was small. But it still demonstrates how, given Outcome 5, it could be a perilous policy to recommend Cautious Managed funds to investors that are perceived to be ‘cautious’ without fully understanding their attitude to risk – and the fund manager’s attitude to risk versus return. That is not to say that Cautious Managed funds are inherently bad, because there are some very successful ones out there with many happy investors. But have they all moved with the times?

Given the advances in the last 11 years within the financial services arena and the change in the regulatory framework, the opportunities to provide sophisticated solutions better accounting for attitude to risk have vastly improved while the penalties for getting it wrong have become more pronounced.

Fortunately these days there are risk profiling questionnaires to accompany the fact find which help you better understand how much risk your client is willing or able to take. There are investment tools to provide asset allocations designed to provide a level of comfort over expected returns for a given level of risk and risk-rated funds offering the same – but with greater efficiency. Fortunately there are now few barriers to fulfilling TCF Outcome 5 for your clients.

Whether you’re placing new business or reviewing cautious funds, Skandia has the tools to help. The Skandia investment proposition will allow you to undertake a rigorous risk assessment, tailor asset allocations to meet client risk appetite, select from an extensive range of funds and review and manage your clients’ investments online. In addition we’re about to launch a Managed Fund Analyser tool (right) to help you check whether those cautious, balanced and active funds continue to meet the needs of your clients.

*Financial Express Analytics IMA Cautious Managed sector to 15 April 2010. # IMA 15 April 2010.

^Total return bid-bid performance from 15 April 1999 to 17 August 2010 of Finex Money Deposit 90 Days Index and IMA Cautious Managed sector from UK IMA UT and OEICs universe. Rebased in pounds sterling.

Mana¯ed Fund Analyser – available from early October 2010 We are about to launch a new tool for financial advisers – the Managed Fund Analyser. The tool measures the historic volatility of managed funds, by sector and by individual fund, to enable you to quickly check whether client investments match their true risk appetite. If not, you can use our risk profiling and matching processes to replace managed funds with more appropriate – and more controllable – investments.

The tool will be available through the Skandia adviser website from the end of September. We’ll let you know when it’s available via our regular informer e-newsletter, or you can follow @skandia on Twitter for all of our latest news and developments.

Past performance is not a guide to future performance.


Adrian Walker looks at the fast pace of change for pensions since the coalition government came to power.

¯et set,

In its first 100 days in power I think it’s fair to say the new coalition government has not let the grass grow long under its

feet; the pace of change to pensions alone is something more akin to a Usain Bolt sprint. Now is a good time to take stock, look at the actions affecting pensions to date and what they mean for your advice.

The panel to the right outlines the long list of potential changes for you to keep abreast of. As always at this stage we know the general direction of government policy, but not the detail.

annuitisation at 75

The consultation on the relaxation of the need to annuitise at age 75 is one such area that is light on detail. Broadly speaking existing unsecured pension (USP) and alternative secured pension (ASP) rules will be replaced by capped income rules which will be generally in line with the existing USP rules. A new concept, flexible income,

is being proposed. This will enable those in income drawdown to draw unlimited income provided there is evidence that they have sufficient other guaranteed income to avoid them having to claim state benefits.

This consultation also includes proposals for the tax change on lump sums paid on death after crystallisation to be around 55% with no inheritance tax charges, and for the taking of tax-free lump sums to be deferred beyond age 75.

The government is intending to introduce these relaxations from April 2011. This would appear to be a tall order given the lack of detail that currently exists and an area we could see delayed – possibly until April 2012.

tax reliefIt is certain that we will see changes to pension tax relief in April 2011. The outgoing Labour Government legislated for the introduction of the higher-rate tax relief

Adrian WalkerHead of Retirement Planning

the knowled¯e

By putting off planning for these changes, you might find you’re rushing around like Usain Bolt trying to cover off all that needs to be done.

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”10 informer September 2010

charge from that date. This will introduce a tax charge for those with incomes above £150,000 that will increase linearly so that those with incomes over £180,000 will be restricted to basic-rate relief on pension contributions made, including employer contributions.

While the coalition government has a policy aim of reducing pension tax relief by the same amount as the previous government had forecast, it views this tax charge as over-complicated. The government is, therefore, consulting on an alternative approach which involves reducing the annual allowance to around £40,000. For this purpose defined benefit accrual will be valued using a factor of between 15 and 20. The consultation also discusses ways in which the annual allowance could be a little higher, which would mean a reduction of the Lifetime Allowance to £1.5 million and slight alterations to the rules around Primary and Enhanced Protection.

If these alternative proposals are introduced clients with incomes as low as £40,000 could find themselves affected, particularly if they have long service in a defined pension

scheme and have received reasonable salary increases. Whatever the final outcome, the changes will have to come into effect from April 2011 to meet the government’s fiscal objectives. We should hopefully get a lot more detail in the autumn.

forward plannin¯Thinking ahead to tax-year end, you could potentially have a lot to mull over with clients when it comes to retirement planning. You may have to consider what contributions can be paid this tax year within the current rules, including anti-forestalling provisions. In addition, it may be worth reviewing clients’ plans for the forthcoming tax year (2011/12) to ensure they do not result in unintended tax penalties.

The temptation right now might be to put off planning for these changes until greater detail is known. However, by doing so you might find you’re rushing around like Usain Bolt trying to cover off all that needs to be done when the changes arrive. I’d suggest making a start as soon as possible for those who wish the pace of change to be a little steadier.

pensions – key areas of chan¯e The need to anuitise at age 75 was temporarily relaxed following the June emergency Budget. This was followed by a consultation document suggesting a more permanent solution.

A discussion document on alternatives to the higher-rate tax relief charge has been published, which could lead to a significant reduction in the annual allowance.

A consultation document on consequential changes to legislation as a result of abolishing Protected Rights has been published. If implemented without change, it will prevent transfers of contracted-out rights from defined benefit schemes to most defined contribution arrangements after April 2012.

A review of the auto-enrolment legislation and NEST is underway.

…as is an evidence gathering process in connection with proposals to accelerate increases in the State Pension Age.


At Epoch, we are experienced fundamental stock pickers and long-term investors who buy companies

that are profitable, cash-flow positive, and have very little debt on their balance sheets. Our analysis is based on company fundamentals, free-cash-flow generation and management’s uses of cash, since half of a stock’s total return may come from dividends, share buybacks, and deleveraging (paying down debt). Though we are bottom-up investors and manage a US portfolio, we understand the need to have a global, macro perspective. This perspective guides us on where to look for ideas that benefit from secular demand as well as areas of risk to avoid.

our lon¯-term visionMuch of Wall Street analyses stocks based on accounting metrics such as earnings and book value which we believe are flawed as indicators because they can be easily manipulated. Quarterly earnings season has become a game that most market participants play unsuccessfully as they try to figure out whether or not a company is going to beat expectations. Even then, the numbers may not be illustrative of how companies are truly performing. We feel the

best metric for valuation is financial rather than accounting based.

Specifically we look at cash generation and cash flow (see panel). Fundamentally, companies that generate a lot of cash will perform better than those that don’t. It is a more transparent and harder to manipulate metric. No matter what earnings say, if a company runs out of cash, it is essentially bankrupt if it cannot keep borrowing money or raising equity.

If we can find management that always does the right thing with its company and appropriately deploys its cash position, half the battle is won. No one can truly predict the future given the economy, the changing financial and regulatory environments, and even acts of God. We must, therefore, have a strong conviction about the management team to entrust them with our investment. We look for honest, highly competent individuals who are on the side of their shareholders and who will never waste our cash. We want them to really understand cash allocation and make optimal use of it.

market outlookWe are often asked what our perspective is, based on the latest quarterly corporate

cash flow is kin¯ David Pearl offers the Epoch perspective to successful long-term equity investing.

cash flow what we look for Management has five options for using its cash, and we look for companies that effectively apply them in the right proportions based on their unique opportunities. They can:

1. grow the businesses by reinvesting (R&D, hiring, building factories, etc.)

2. grow through acquisition

3. pay dividends

4. buy back company shares

5. deleverage (pay down debt).

When management believes it can earn effective returns on its investments in excess of its cost of capital through new projects, they should consider the first two options. If not, they should return the money (cash) to shareholders through one or more of the latter three options.


earnings announcements. As long-term investors, one quarter’s results taken alone are far less important than whether the company fundamentals are going in the right direction.

Many US companies reported good earnings in the second quarter of 2010, but fewer beat expectations on revenues. Even those that beat profit forecasts were not aggressively raising guidance on future revenues, which we believe is the most important metric to take from this earnings season. Results have been decent because management cut costs and restocked inventory earlier in the crisis, but many remain very cautious about end-demand moving into 2011 given the current economic uncertainty. Also, year-over-year comparisons will become more difficult now as it was far easier to show double-digit growth over significantly depressed levels a year ago. A company can only cost cut its way to profitability for so long and that game is effectively over.

More importantly, US corporations have historically high levels of cash and many are not spending currently because of the lack of demand as consumers save more. Companies are spending on quick payback

opportunities like technology. There is a lot of pent-up demand; the last big computer purchasing cycle was in 2000 and equipment is becoming obsolete. As we had anticipated, we are seeing business spending return for short-lived assets. We continue to favour select technology companies that should be beneficiaries of this spending cycle, particularly those in information services whose products create operating efficiencies. Agriculture is also a great secular demand story as emerging countries improve their eating habits and are moving from grains to meats.

As we are now in a slow growth environment, we feel larger companies offer the best total return prospects and the winners will be those with end-demand for their products. Many of these companies will use their cash, at least partly, to pay dividends, buy back shares, and deleverage. We believe the companies that actually provide the most consistent total return will be those that are growing free cash flow and returning it back to their shareholders.

David Pearl is Co-CIO and US Equity Portfolio Manager at Epoch Investment Partners.

Skandia Investment Group selected Epoch to run the Skandia US Large Cap Value Fund – part of the Skandia Signature range of researched funds.

SIG comments: “Independent boutique Epoch has delivered strong long-term results through a focus on buying stocks that are cheap with strong and sustainable cash flow and a pragmatic approach.”

For more on Signature, please see page 9 of the informer fund performance booklet or visit bit.ly/bceLIG


Bonds come in all shapes and sizes with differing risk profiles and potential returns. For example, low yield and

commensurate low risk from a UK, US or German Government Bond or a much higher yield and potential return from riskier investments such as High Yield Bonds.

While this amount of choice can be confusing for investors, the IMA bond sectors do provide a starting point when looking at funds in which to invest. There are four of note - Gilt, Corporate Bond, High Yield and, probably the most interesting and least easy to understand from the name, the Strategic Bond sector. While the three aforementioned sectors provide an investor with at least some idea of what the constituent funds may invest in, Strategic Bond requires some further investigation.

definin¯ strate¯ic The IMA shuffled the bond sector classifications two years ago after a lengthy consultation period with investors, advisers and fund managers. Previously, funds that failed to qualify for the Corporate Bond sector were pushed into the appropriately

named Other Bond sector. This gave investors a hotch-potch sector with funds investing in global government bonds, some others largely exposed to High Yield Bonds and a few which invested in instruments such as preference shares. This left a sector with funds that had little if any relevance to each other and investors unable to compare and contrast in any meaningful way.

The clarification of the rules for the Corporate Bond sector (where funds have a minimum 80% in investment grade corporate bonds) and the High Yield sector (minimum 50% of fund in sub-investment grade debt) meant a third sector was necessary for funds which had a more flexible approach. This led to the birth of the Strategic Bond sector for bond funds not fitting in the two definitions above.

strate¯ic approaches There are almost 70 funds in the Strategic Bond sector, managed by a range of houses, both large and small, and adopting a variety of strategies. For example some funds within this group are managed relative to specific and fairly static allocations between

room to manoeuvre

Roger Webb explains how he makes full use of the diversity and flexibility of the bond market with the aim of avoiding the pitfalls of falling markets.


strate¯ic asset allocationInvestment management firms, like SWIP, employ large teams of specialists managing a variety of different bond assets and hope to add value by asset allocating amongst them. As a result these funds are also very capable of offering clients a solution which taps into all these specialisations and achieves the right asset allocation for the right environment. Many of the true strategic funds also have a global focus allowing them to take advantage of a wider opportunity set and most use derivatives to ensure that management is as efficient and cheap as possible – crucial in the current market conditions.

Fund returns in 2009 were remarkable. The IMA UK Corporate Bond sector average rose by 14.3%*, while the IMA High Yield sector average went ballistic, gaining 62.5%*. These were big numbers for fixed-income investments and are unlikely to be repeated any time soon. In the future, we expect the economic recovery to be a drawn out one with interest rates staying low for some time in the UK, Europe and the US. The long and fragile nature of the recovery is likely to lead to continued volatile markets with plenty of opportunities for investors. In this new, tougher environment, fund managers will need a broad range of weapons in their armoury and possess the ability to react quickly to specific events. A bit of nerve wouldn’t go amiss either.*Source: Lipper

The SWIP Strategic Bond Fund will be available through Skandia Investment Solutions shortly.

investment grade and High Yield bonds. The idea here is to mix assets which behave differently in similar conditions and hence achieve a better risk/return profile. Other funds are run for income purposes – one of the main reasons for buying bonds for many investors.

A third very important grouping can also be

identified and it is this which warrants some further

investigation. A significant number of participants in the Strategic Bond

sector exist to provide investors with the highest possible total return by actively allocating across a range of bond assets. This category has been very successful of late as clients and their advisers are increasingly happy to pass the asset allocation to their fund managers in order to focus their own attention on the bigger picture.

thinkin¯ tactically The most effective armament is the ability to adopt a more flexible way of investing – this is key to generating long-term returns, and those managers who can think quickly

and tactically to exploit the full range of strategies available are likely to be those who deliver the best performance. For example, in a rising inflation world, managers can make use of index-linked bonds to protect against the corrosive effects of inflation. And a bond fund manager that isn’t married to a particular domestic benchmark has the opportunity to take advantage of the attractive opportunities in global bond markets.

The timing, then, is perfect for Strategic Bond funds. We have seen huge inflows into the sector because of its added flexibility over pure asset classes like sovereign and high yield. It is down to the ability of each manager to move from one area to another to take advantage and avoid the pitfalls of a falling market. In the SWIP Strategic Bond Fund, which we launched in June of this year, all the available skills of a large team as well as the tools required to manage multi-asset funds are put to work to get the right asset split for our clients. Given the current market environment we believe it is going to be crucial to get in and out of asset classes at the right time as conditions change.

Roger Webb is Investment Director at SWIP and co-Manager, with Luke Hickmore, of the SWIP Strategic Bond Fund.


Joe Le Jéhan explains why strategic asset allocation and the ability to rotate exposure between asset classes remain critical to multi-asset investing.


Our multi-manager investment approach is based on the belief that no single fund group can excel in all

asset classes through all market conditions. Our research and ongoing monitoring of funds is designed to identify outstanding fund managers, across various asset classes, who have the potential to deliver excellent performance in the prevailing investment climate.

Historical data shows that over the longer term equity investing provides some of the best returns. However, history also shows that equities can be one of the most volatile asset classes to invest in. While fixed income has traditionally been used by investors to diversify portfolios, a wider range of asset classes has emerged to enable investors to create more efficiency when balancing risk for reward.

true diversificationDiversification across asset classes should provide consistent returns and low volatility through any economic scenario. Recent events, however, have shown that successful multi-asset investing requires more than this. Diversification in isolation, in fact, has proved to be quite ineffective. The global unwind saw correlations between asset classes increase significantly, reducing the benefits of diversification as a result. But this is only part of the story. The key to multi-asset investing recently has been to find those asset classes set to benefit from particular conditions but also, crucially, steering clear of those which faced difficulties. Anyone exposed to private equity or property over the past three years would probably agree. These were areas to avoid as the global deleveraging process saw liquidity withdrawn from the system at an unprecedented rate and valuations adjust downwards accordingly.

If the financial markets continue to lurch from pricing one extreme scenario to another then the need to find an appropriate asset mix becomes ever more important. What if inflation concerns reappear for example? Perhaps broader exposure to real assets (direct property, commodities et al) or inflation-linked bonds may provide some upside. Or deflation: where cash, government bonds and perhaps even gold may make interesting investment options. Ultimately, managers who can offer a tactical approach to diversification in a flexible framework should prosper in any scenario.

strate¯ic allocation remains critical Despite the apparent turmoil, there were areas to make money last year. Certain structured products, for instance, provided downside capital protection against falling equity markets, while providing a stable yield. Even still, the issues of many financial institutions meant counterparty risk was a troublesome concern in choosing the right product. Selected hedge fund and fixed interest holdings may also have helped performance.

The willingness to strategically allocate between asset classes therefore remains critical to successful multi-asset investing. But is it enough? We think not – it is just as important to find a manager willing to rotate exposure within asset classes.

Look at equities for instance. To provide a consistent return through 2008 you needed completely different portfolios from one period to the next. In the early months, China related industries, such as miners and commodities, led the market as inflation remained a concern and oil spiked up above $140 in mid-July. Holding onto such a portfolio in the second half of the year would have been disastrous as thoughts turned to an impending recession and many of these same areas were savaged.

Unfortunately, history has shown us that many investors do get caught out at these turning points – having ‘followed the herd’ to these popular areas only to find themselves overweight as markets reverse. We’ve seen it all before; we only need to look back at the end of the property boom and the losses that those late to the party suffered to remind ourselves.

opportunities remainWith both equity and credit markets suffering, it has not been a great time to be a traditional equity/bond manager. However, in a more diversified portfolio such as ours, there were areas to make money. Some we benefited from and others we will look towards should markets deteriorate further. Alternatives can provide relatively uncorrelated returns and we have been adding to these funds – this has undoubtedly helped our relative performance recently.

Joe Le Jéhan is an Analyst in the Cazenove Capital Multi-Manager team.

The Cazenove Multi-Manager Diversity Fund is available through Skandia Investment Solutions.

Ultimately, managers who

can offer a tactical approach to

diversification in a flexible framework

should prosper in any scenario.

“

”Cazenove Multi-Manager Diversity Fund Against a background of economic uncertainty the Cazenove Multi-Manager Diversity Fund aims to strike the right balance between caution and opportunity. It invests in a diverse range of asset classes (including fixed income, alternatives and equities) hence risk is spread further which, in turn, helps achieve consistent and less volatile returns for your clients.

The ability to draw upon different asset classes has been critical to investment success in recent times. We see no reason for this to change in the future. Add in sufficient flexibility to be nimble, but provide a structure that builds an appropriate expectation amongst clients, and you’ve gone a long way to supplying a compelling solution in what are quite extraordinary times. This is the demand which the Cazenove Multi-Manager Diversity Fund seeks to satisfy.


strate¯ically minded

How can investors make money, no matter what is happening in the economy and markets? There are

obviously no guarantees. But you can maximise your chances of good returns by investing not just in a range of different equities, but in a variety of assets as well.

The trick, of course, is choosing the right class or classes of investments – in the right proportions. There will be times when bonds outperform equities, when commodities beat currencies, and so on. So funds that have the freedom to change and diversify their asset allocation make sense – especially in these volatile times. Which assets though, and when?

These are difficult decisions for advisers, easier to get wrong than right. At the same time, you need to match a ‘cautious’ fund with clients’ needs and expectations, particularly with reference to TCF Outcome 5. That’s why a multi-asset fund also needs to be straightforward and transparent, as easy as possible to explain and to understand.

keepin¯ it simpleThat is why we decided to keep this fund as simple as possible. Making the most of the legislation on collective investment funds, this fund has, we think, the best characteristics of both unit trusts and hedge funds. As and when they are appropriate, I use exchange-traded funds, derivatives, short-selling and other financial instruments in search of superior returns. But I do so within a traditional unit trust structure. That means the daily pricing, liquidity,

transparency, security and controlled counterparty risk which a traditional unit trust brings advisers and their clients.

The fund’s management style is primarily macro-driven, supported by my stock picking skills and those of my colleagues. Working from our London office, I draw on the support, resources, research and experience of my 15 investment colleagues, all highly practiced in their different fields. When hunting bonds, I get input from the Artemis bond team. When smaller companies seem right, I have the expertise of our smaller companies team, and so on. And to give me additional resource in analysis and research, as of the end of this month I will be joined by Giles Parkinson, who comes to us from Newton as an investment analyst dedicated to this fund.

Drawing on these resources and using the unit trust structure, I take the crucial asset allocation decisions. I move between a high and low equity exposure, depending on circumstances and allocate assets as I see fit between: • Equities (UK and overseas)• Fixed interest (UK and overseas)• Commodities• Currencies

I do so with one, clear objective in mind: perform well when markets are favourable, and preserve capital when markets are poor. The aim is longer-term positive returns under most market conditions and to outperform both cash and equities over rolling three-year periods. It means that I wouldn’t expect to keep up with, say, a

surging equity market over the short term. But when the market falls, I would expect to deliver relatively good returns. We make this clear to advisers, so that everyone knows where they stand.

current position That’s the theory. What about the fund in practice? Our net equity position is 77% at the moment. I continue to believe that equities are the best asset class to be in. Yields available on both cash and government bonds are derisory, and compare unfavourably with equities where many high-quality companies are trading on price/earnings ratios of 14x and below. Furthermore, if I am right and policymakers resume quantitative easing, then this will be beneficial to equities (and gold). In addition, I expect real interest rates to remain negative for some time to come, which should serve to increase the attraction of equities.

Over recent months we have slowly been increasing our exposure to large, high-quality companies that are either market leaders or that have been in existence for many years. Many of these large companies are overseas and are priced at extremely low levels, relative to their history.

As for bonds, I view the government bond market as a giant bubble. 10-year yields in Japan are now 1%, under 1.5% in Switzerland, about 2.5% in Germany and under 3% in the US. In the UK, despite inflation being 3.2% (or 5% if you prefer to use RPI), the 10-year bond yields a little over 3%. Certain parts of the corporate market have been affected by this mania – as evidenced by the recent

William Littlewood explains why his clear approach to managing the Artemis Strategic Assets Fund helps clients to know where they stand.


$1.5 billion three-year bond issue from IBM that had a yield of 1% (we hold the equity which is on a p/e ratio of 12).

These are levels which will only make a proper return for investors if inflation is eradicated for the next 10 years – a scenario I view as extremely unlikely. They are also yields which show scant regard to the history of governments printing money, let alone their ability to generate inflation. We have held back from increasing our level of government bond shorts, but at some stage we will increase our positions.

Turning to commodities, I have recently increased our positions marginally, mainly by adding to platinum and palladium. Our gold position is 4.2% of the fund. We have continued to reduce our agricultural exposure into rising prices. I like the outlook for our commodities, particularly gold. I view gold as an alternative currency which should benefit from any further quantitative easing. And historically, gold has performed well when, as today, real interest rates are negative.

In our currency overlay, we continue to hold large positions in Asian currencies. The prospects for most Asian countries, and therefore for their currencies, is extremely good. Because economic growth has been so robust in these countries, they are likely to begin putting up their interest rates. That will serve to make these currencies even more attractive to investors.

Overall, markets are caught between good corporate results on the one hand and a weakening macro-economic outlook on the other. But thanks to our multi-asset approach we believe we will meet clients’ expectations – come bull or bear.

William Littlewood is fund manager of the Artemis Strategic Assets Fund.

The Artemis Strategic Assets Fund is available through Skandia Investment Solutions.

In these volatile times, investors have to be nimble and move quickly between different asset classes. That is precisely what this fund does: it seeks out profits, wherever they’re to be found.

about the mana¯er…William Littlewood graduated from Bristol University with a degree in Economics. He worked at Jupiter Asset Management from 1989 to 2000, where he managed £1.6 billion in top-performing* assets. He then joined Artemis in December 2005 to run the Absolute Return Hedge Fund. In managing the Artemis Strategic Assets Fund, William adds the resources and expertise of Artemis’ 15 other fund managers to his own extensive experience of multi-asset investing.

The Artemis Strategic Assets Fund has returned 4.5%** year-to-date compared to a return of 0.33% from the FTSE All Share.

*Source: Lipper, 3,288 days from 30 November 1990 – 1 December 1999.

**Source: Lipper Limited, bid to bid in sterling with net income reinvested to 30 July 2010. All figures show total returns.

Past performance is not a guide to future performace.

“

”

All fund information correct as at August 2010 September 2010 informer 19

The performance figures include all external fund management fees and (for Skandia Life and Royal Skandia funds) the life company’s Annual Management Charge, but do not include any other product charges. All Skandia products are subject to their own charges as well as those reflected in the unit prices. Fund performance figures shown are not therefore an indication of the performance of any particular product.

For MultISA, the performance does not allow for tax reclaims that have been available at various times in the past.

For Skandia Life and Royal Skandia funds invested in unit trusts or OEICs, the performance of the Skandia fund will not mirror the performance of the underlying fund because of product charges, taxation adjustments (where appropriate) and the life company investment process.

Where a fund invests in securities designated in a different currency to the fund, or where an underlying fund is denominated in a different currency, investments may rise and fall purely as a result of exchange rate fluctuations.

Special risks apply to emerging market funds in addition to the normal risks of investing in securities. Their prices may fluctuate considerably, and local dealing restrictions may make some securities illiquid. Investment in these funds should be regarded as long-term in nature and is only suitable for investors who understand the risks involved.

The inclusion of any particular fund in informer does not imply that it is suitable for a particular investor. Skandia does not provide advice on selecting investments – investors should consult their financial adviser on the merits of any particular investment.

The Financial Express sourced information is provided to you by Skandia UK Group and is used at your own risk. Financial Express takes care to ensure that the information provided is correct. Neither Financial Express Limited nor Skandia UK Group warrant, represent or guarantee the contents of the information, nor do they accept any responsibility for error, inaccuracies, omissions or any inconsistencies herein.

Unit prices may fall as well as rise.

You should note that past performance is not a guide to future performance.

Websitewww.skandia.co.uk

Please contact us at [email protected] if you would like us to e-mail you when informer is updated on our internet site, or for any distribution enquiries.

Contact numbersE-Commerce helpdesk: 0800 0851 585 – call free between 8.00am and 6.30pm Monday to Friday, for any technical support using Skandia’s

online servicesSkandia Life and Pensions valuations: 0800 181 396 – call free between 8.30am and 5.30pm Monday to Thursday and 9.30am and 5.00pm on Friday,

for valuation requests for all Skandia life and pension plansSkandia Life and Pensions servicing: 0844 556 0821 – call between 9.00am and 5.00pm Monday to Friday, for all enquiries (excluding valuations)

for all Skandia life and pension plansSkandia Investment Solutions: 0845 641 0410 – call between 8.30am and 5.30pm Monday to Friday, for all general enquiries

Calls may be monitored and recorded for training purposes and to avoid misunderstandings.

Skandia provides you with access to its investment platform, known as Skandia Investment Solutions. Within this platform you can open an ISA and Collective Investment Account provided by Skandia MultiFUNDS Limited, a Collective Retirement Account and Collective Investment Bond provided by Skandia MultiFUNDS Assurance Limited and an Offshore Collective Investment Bond, distributed by Skandia MultiFUNDS Limited but provided by Old Mutual International (Guernsey) Limited.

Skandia Life Assurance Company Limited, Skandia MultiFUNDS Limited, Skandia Investment Management Limited and Skandia MultiFUNDS Assurance Limited are registered in England & Wales under numbers 1363932, 1680071, 4227837 and 4163431 respectively. Registered Office at Skandia House, Portland Terrace, Southampton SO14 7EJ, United Kingdom.

All companies are authorised and regulated by the Financial Services Authority with FSA register numbers 110462, 165359, 208543 and 207977. VAT number for all above companies is 386 1301 59.

Old Mutual International (Guernsey) Limited is regulated by the Guernsey Financial Services Commission and is licensed to write long-term business under the Insurance Business (Bailiwick of Guernsey) Law 2002. Registered number 2424. Registered Office at Albert House, South Esplanade, St Peter Port, Guernsey GY1 1AW, Channel Islands.

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