This refers to performance growth. There are three types as shown below:
The portfolio manager seeks to grow investors’ capital over the long term.
The approach or the scope of investment (and often both), is likely to mean that the portfolio could be positioned less defensively – particularly at times of market stress – when compared to a portfolio that has a ‘positive-return-bias > 3 – 5 years’ outcome.
The emphasis is on the longer term and at times the portfolio manager may be tolerant of volatility.
The portfolio manager may be seeking to deliver long term growth but must demonstrate a strong commitment to attempting to deliver a positive return over a 3-to-5-year period, either by using tactical asset allocation or by including defensive assets on a permanent basis.
The portfolio manager must follow an approach, or have access to investments, that provide sufficient scope to limit the extent of portfolio drawdowns – particularly at times of market stress.
The time horizon for achieving a positive return is typically longer than for a portfolio that has a ‘positive return bias < 3 year’ outcome, and the level of volatility is expected to be higher.
The portfolio manager must demonstrate a strong commitment to delivering performance with relatively low sensitivity to the returns from traditional equity and bond markets. Typically, the distribution of monthly returns is likely to be narrow.
Under normal market conditions the portfolio should exhibit lower volatility and a shallower drawdown when compared to a portfolio that has a ‘positive return bias > 3 – 5 year’ outcome. The time horizon for achieving a positive return is also shorter by comparison.
The level of performance growth targeted by the portfolio manager is shown below where the target icon appears in a portfolio’s DNA graphic. Not all portfolios have a specified performance growth target, so the target icon won’t always appear.
Income delivery. There are three types as shown below. Not all portfolios prioritise the delivery of income, and where this is the case a No-Entry sign is shown immediately below the Income icon to denote that income isn’t a key focus for the portfolio.
The portfolio aims to distribute a level of income that occurs naturally from the underlying investments it invests in. The portfolio manager is unlikely to chase higher sources of income and the income delivered will fluctuate over time. Typically, income is paid either quarterly or monthly.
The portfolio manager must demonstrate a strong commitment to delivering a progressively rising stream of income for investors over the long term – generally starting at a yield of around 3% a year in today’s market. Typically, income is paid either quarterly or monthly. Having ‘income’ in the portfolio’s name or income simply being a by-product of the investment process is not sufficient to qualify.
The portfolio manager must demonstrate a strong commitment to delivering a sustainably high level of income for investors over the long term and throughout different market conditions. The income yield is likely to be around 3% a year or higher in today’s market. Typically, income is paid either quarterly or monthly. Having ‘income’ in the portfolio’s name or income simply being a by-product of the investment process is not sufficient to qualify.
The level of income yield that the portfolio manager aims to achieve is shown below where the target icon appears in a portfolio’s DNA graphic. Not all portfolios have a specified income yield target, so the target icon won’t always appear.
This refers to where a portfolio has a defined volatility parameter or is managed to specific volatility guidelines. There are three methods used by multi asset portfolio managers to help them define a portfolio’s volatility parameters and these are shown below.
Not all portfolios have specified volatility parameters, and where this is the case a No-Entry sign is shown immediately below the Volatility icon to denote that managing volatility to specified parameters isn’t a feature in the way that the portfolio is managed.
The portfolio manager seeks to maintain longer-term volatility below a specified ceiling level. Typically, the specified volatility ceiling is expressed either in absolute terms or as a percentage of the volatility of a stock market index.
Arguably, operating to a volatility ceiling may give the portfolio manager greater flexibility to defend returns during periods of market stress when compared to a portfolio that has a ‘volatility corridor’ outcome.
Some volatility ceiling portfolios may operate as part of a broader suite where the return from each portfolio in the suite is managed below a different volatility ceiling level.
Simply being ‘risk rated’ by a third party is not sufficient to qualify.
The portfolio manager seeks to maintain longer-term volatility below a specified ceiling level. Typically, the specified volatility ceiling is expressed either in absolute terms or as a percentage of the volatility of a stock market index.
Arguably, operating to a volatility ceiling may give the portfolio manager greater flexibility to defend returns during periods of market stress when compared to a portfolio that has a ‘volatility corridor’ outcome.
Some volatility ceiling portfolios may operate as part of a broader suite where the return from each portfolio in the suite is managed below a different volatility ceiling level.
Simply being ‘risk rated’ by a third party is not sufficient to qualify.
The portfolio manager seeks to maintain longer-term volatility below a specified ceiling level. Typically, the specified volatility ceiling is expressed either in absolute terms or as a percentage of the volatility of a stock market index.
Arguably, operating to a volatility ceiling may give the portfolio manager greater flexibility to defend returns during periods of market stress when compared to a portfolio that has a ‘volatility corridor’ outcome.
Some volatility ceiling portfolios may operate as part of a broader suite where the return from each portfolio in the suite is managed below a different volatility ceiling level.
Simply being ‘risk rated’ by a third party is not sufficient to qualify.
The Risk v Equities scale is intended to provide a broad guide as to the level of portfolio volatility we might expect to see relative to (as a percentage of) broader equity markets. It’s not intended as a firm predictor of portfolio volatility levels.
This refers to the types of underlying product structure used in the portfolio. There are five types of underlying product structure as shown below (see immediately after the structure bar icon).
This shows, broadly speaking, the extent to which each underlying product structure is used in the portfolio – with ten bars meaning 100%, and one bar meaning up to around 10% of the portfolio. One bar can also be shown to denote that the portfolio has infrequent or rare exposure to a particular product structure.
It’s important to note that structure bars aren’t meant to reflect the portfolio’s positioning at any one point in time, but a broad average over the longer term. As such, a portfolio’s structure bars might not add up to ten (meaning 100%).
Exposure to individual (or directly held) securities, such as individual equities, or individual bonds. Investment trusts aren’t included.
Exposure to actively managed funds. These could be internally managed or externally managed funds and the definition covers both onshore and offshore funds. Investment trusts aren’t included.
Exposure to passive instruments such as index tracking funds or exchange traded funds (ETFs). Derivatives might provide similar exposure, but these aren’t included here.
Exposure to traditional investment trusts, split capital investment trusts (zero dividend preference shares can feature in some portfolios) and real estate investment trusts (REITS).
These investments are generally constructed by investment banks by combining two or more assets to create a pre-packaged product that delivers a return based upon the underlying returns of those assets over a specified period. The opportunity set is very wide and can include linking the investment’s return to a single security, a basket of securities, options, indices, commodities, debt issuance or currencies.
The terms of each product dictate the level of participation an investor might enjoy in the returns of the underlying asset or assets.
Exposure to derivatives. The main types of derivative instrument used by multi asset portfolio managers are futures contracts, options contracts, and to a lesser extent contracts for difference. FX forwards are also commonly used to help mitigate against currency risk, but these aren’t specifically included in our definition.
Derivatives can sometimes exaggerate investment risk so it’s important that we know how they’re being used. Over the counter (OTC) derivatives, as opposed to exchange traded derivatives, can also include additional counterparty risk.
This refers to the types of asset class that a portfolio provides access to. There are four broad asset classes as shown below (see immediately after the asset bar icon).
This shows, broadly speaking, the extent to which each asset class is used in the portfolio – with ten bars meaning 100%, and one bar meaning up to around 10% of the portfolio. One bar can be shown to denote that the portfolio has infrequent or rare exposure to a particular asset class.
It’s important to note that asset bars aren’t meant to reflect the portfolio’s positioning at any one point in time, but a broad average over the longer term. As such, a portfolio’s asset bars might not add up to ten (meaning 100%).
This refers to shares in companies irrespective of their geography or industrial sector.
This refers to a wide variety of fixed income investments and includes: conventional government bonds, corporate bonds, emerging market corporate bonds, emerging market government bonds (both hard currency and local currency), high yield bonds, index linked corporate bonds, index linked government bonds, infrastructure debt, loans, short dated corporate bonds, short dated government bonds and strategic bond funds.
Cash and money market funds.
Any class of investment that can’t be classified with equities, bonds, and cash. Examples include: Asset backed securities, commodity trading advisers (CTAs), direct property, gold and other commodities, hedge fund type strategies, long / short funds, macro funds, market neutral funds, mortgage backed securities, private equity investment trusts, property securities, real estate investment trusts (REITS), infrastructure equity, royalties, volatility strategies.
This refers to the geography of a portfolio’s allocation to equities. There are five broad geography classifications as shown below:
The portfolio’s equity exposure is > 80% to the UK.
Equity exposure outside of the UK is therefore < 20%.
The portfolio’s equity exposure is >= 60% but < 80% to the UK.
Equity exposure outside of the UK is therefore > 20% but < 40%.
The portfolio’s equity exposure is 40% <>= 59% in the UK, and 40% <>= 59% outside of the UK.
The portfolio’s equity exposure is >= 60% but <= 79% outside of the UK.
Equity exposure to the UK is therefore > 21% but < 40%.
The portfolio’s equity exposure is >= 80% and the exposure to US equities is <= 40%.
Equity exposure to the UK is therefore < 20%.
The portfolio’s equity exposure is >= 80% and the exposure to US equities is >= 41%.
Equity exposure to the UK is therefore < 20%.
The geography of the portfolio’s equity exposure is entirely flexible, and its geographical bias can therefore change over time.
This refers to the level of complexity in a portfolio’s design. It includes a qualitative assessment of how complex and intricate its asset allocation profile is, and / or the complex nature of its underlying holdings.
The issue of complexity is sometimes overlooked when assessing client suitability.
There are four categories of complexity as shown below.
The portfolio’s design is straightforward, and its asset allocation mainly provides access to mainstream equity markets and traditional bond markets. More complex investments and alternative asset classes are avoided.
The portfolio’s design is relatively straightforward, and its asset allocation mainly provides access to mainstream equity markets, traditional bond markets, and property. Alternative asset classes may also be held, but complex investments are generally avoided. Specific exposure to single industries, or allocations to individual countries other than the UK, US, and Japan, is unlikely to feature.
Fewer sub-asset classes are used when compared to portfolios that have a more granular asset allocation profile.
The portfolio includes exposure to a large number of sub-asset classes. This can include having dedicated exposure to certain industries, sectors, themes and even to subsets of these. The asset allocation profile is therefore more granular and intricate when compared to a more traditional portfolio.
The portfolio’s design and the types of instruments used are complex. This can include extensive use of hedge-fund-type techniques and risk mitigation techniques. Derivatives may feature to a large extent – including the use of over the counter (OTC) derivatives, pair trades, swaps, swaptions and forward contracts.
This mainly refers to the magnitude of tactical activity observed at the top asset class level. More specifically, the magnitude of change in the weight awarded over time to broader asset classes, such as equities, bonds, cash, and alternatives.
However, it can also refer to the extent to which the portfolio is likely to differ from the make-up those in its closest peer group.
There are four broad classifications as shown below.
The portfolio’s asset allocation profile is static or fixed and doesn’t change over time. Asset allocation positions are therefore regularly rebalanced back to their neutral or strategic asset allocation weights.
However, some portfolios where the asset allocation is ‘static’ throughout the year but then reviewed annually are also included.
The magnitude of tactical asset allocation changes tends to be relatively small. This may be because the portfolio manager operates to a limited tracking error budget relative to the peer group, IA sector, benchmark, or other internally constructed asset allocation framework.
The magnitude of tactical asset allocation changes tends to be relatively moderate. For example, over time the change in weight to one of the broad asset classes, such as equities, bonds, cash, and alternatives, (and to equities in particular) rarely exceeds 10% to 15%.
The magnitude of tactical asset allocation changes tends to be significant. For example, historically the change in weight to one of the broad asset classes, such as equities, bonds, cash, and alternatives, (and to equities in particular) has exceeded 20%.
This refers to the methodologies used by the portfolio manager when considering or incorporating environmental, social and governance issues (ESG). There are six different methodologies as shown below, and portfolio managers can adopt more than one;
ESG issues aren’t considered.
The portfolio manager operates a policy that automatically excludes certain types of company from being included in the portfolio.
The portfolio manager considers the known and potential risks associated with the environmental, social and governance impact a company might have on its employees, customers, the wider community, and the climate. These considerations are then weighed against the likely impact on the company’s share price and borrowing via the bond market. The portfolio manager then takes a view as to whether the potential rewards of including the company in the portfolio outweigh the risks. A high degree of subjectivity is involved.
The portfolio manager considers the environmental, social and governance impact a company might have on its employees, customers, the wider community, and the climate and will only invest in companies that display positive characteristics in this regard.
The difference between ‘positive integration’ and ‘impact investing’ is that ‘impact investing’ involves greater clarity of the goal to do ‘good things’ (the intentionality) and that these intentions are measurable in terms of their impact upon society and the climate.
The portfolio manager actively engages with underlying companies with a view to encouraging them to improve their ESG credentials. This can include engaging on governance topics such as improving shareholder rights and board quality; environmental issues like energy transition (persuading companies to replace fossil fuel extraction with renewables); and social subjects such as cybersecurity and data privacy.
The portfolio manager also votes, usually at annual general meetings, either to support or to oppose policies of company boards.
The portfolio manager specifically targets companies involved in certain themes or initiatives that have a beneficial impact upon the planet and / or society, such as those specified in the United Nations Sustainable Development Goals. For example, the themes might be related to renewable energy, or to delivering a positive impact on a certain sustainable theme. Impact investing is therefore a form of positive screening.
There are three key components.
1). There must be intentionality. The portfolio manager makes a deliberate, targeted effort to exert a positive impact.
2). The investment should generate a positive return. This is the key difference between impact investing and descending into charity or philanthropy, where there’s no expectation of monetary return.
3). The financial, social, and environmental benefits of impact investing need to be measurable and transparent – and therefore tangible. The ability to measure impact is another key difference between impact and other methods of ESG investing.
This refers to investment style. Understanding the types of financial metrics that the portfolio manager looks for when seeking to invest helps us to identify what investment style(s) might be in play. In many cases a portfolio manager might incorporate a number of different investment styles in one portfolio.
This is important, because individual investment styles can perform differently throughout the economic cycle and under a range of scenarios.
Our Multi Asset DNA graphic aims to identify the key styles used in the management of a given portfolio.
Identifying investment style(s) can therefore help us to understand the likely market conditions that might benefit or even hinder a portfolio’s performance (its investment journey) relative to its peers. We might decide to be more tolerant of periods of tepid performance when the prevailing market backdrop isn’t conducive to the portfolio manager’s style. Conversely, we might become more critical, or at least ask questions, if the portfolio manager’s style is supported by the market backdrop, but portfolio performance is still poor.
Value investors believe that a company’s intrinsic value can be determined by using mathematical techniques such as discounted cash flow analysis. If the calculated intrinsic value is greater than the current market value of a company’s shares, then the shares represent a buying opportunity. Often a margin of safety is applied so that shares are only purchased when they’re at a certain level below their intrinsic value, and then sold when the share price increases to achieve the intrinsic value.
Typically, shares in companies with ‘value-style’ characteristics exhibit a low price to earnings ratios (P/E ratio), low price to sales ratios, and they often generate higher dividend yields when compared to the market average.
Unlike passive investors, value investors don’t believe that stock markets behave efficiently.
Can perform well:
When markets begin to recover after the bursting of an asset bubble.
When real bond yields spike, rather than move up gradually.
In the 12 months after earnings per share (EPS) growth reaches a bottom.
When profits growth is abundant, meaning that investors can be more discerning over the price they pay for companies.
Can lag:
During a mid-cycle slowdown or towards the end of a bull market.
Growth investors look for firms that have above average growth prospects. They’re less concerned about company valuations provided that a company and its share price is expected to continue growing. Growth investors are in it for the long haul.
Growth companies exhibit high earnings growth rates, high return on equity (ROE), high profit margins and low dividend yields. Businesses with these characteristics often grow rapidly by reinvesting most or all their earnings to boost growth.
Can perform well:
When economic growth is weak and real bond yields are falling (regardless of the size of the move), or when real bond yields and inflation are persistently low.
When profits growth is scarce, and investors are willing to pay more for growing companies.
Can lag:
After a recession when markets begin to recover.
Growth companies are more highly rated – they have higher price earnings ratios (PEs). Their shares therefore have farther to fall if they happen to fall from favour.
Quality companies have stable earnings and good balance-sheet strength. They have durable business models and are better able to fend off competitive pressure because they have strong economic moats – for example, sought after products and high barriers to entry for competitors.
Quality companies exhibit high returns on equity (ROE), which is a measure of how successfully a business uses equity to produce profits.
Can perform well:
During market downturns when investors favour companies with strong balance sheets, high barriers to entry for competitors, more predictable earnings, and sustainable business models.
A low interest rate, low inflation environment is generally beneficial for quality companies with highly cash generative business models that enable them to pay sustainable (bond-like) dividends.
Quality companies are more likely to deliver steady returns that compound over long periods and are less likely to generate performance in strong, short bursts.
Can lag:
When markets recover in the immediate aftermath of a recession.
Momentum investors invest in a non-emotional way by buying and selling shares based upon technical analysis that shows when shares are moving above or below their medium or long-term average levels. They therefore look to buy on positive momentum and to sell on negative momentum.
Momentum investing is characterised by backing short term trends in sectors and themes.
Can perform well:
When short term trends are easier to spot.
In a strongly rising market when the herd instinct of investors is more prevalent.
Can lag:
Immediately after a significant change in market direction – either positive or negative – when new trends are hard to identify.
Similarly, during other periods when market momentum is hard to identify. For example, during periods when the direction of markets continually rotates rapidly, or when markets are trendless and drift sideways.
Income investors seek to invest in assets that generate income – for example, in the form of dividends, interest payments or rents.
Generally speaking, the higher the income yield, the stronger the income style is.
Can perform well:
A strong income factor can perform well during periods when markets begin to recover after the bursting of an asset bubble.
An environment when base interest rates are falling can also be beneficial.
Individual investment styles can perform differently throughout the economic cycle and under a range of scenarios. Many multi asset portfolio managers therefore seek to provide exposure to different investment styles by blending them together – in particular, by providing exposure to both value and growth styles. In theory, this should result in less exaggerated patterns of returns.
Can perform well:
The expectation is that a style blended approach ought to perform well when measuring portfolio returns from the beginning to the very end of an investment cycle. I.e., over an entire investment cycle.
In the meantime, during certain phases of the investment cycle, a blended portfolio approach might outperform others that offer a strong style bias – for example, a bias towards growth or value – when their particular investment style is strongly out of favour with investors.
Can lag:
Conversely, returns from a blended portfolio approach might lag others that offer a strong style bias during periods when investors strongly favour their particular investment style.
A theme is a top-down disruptive trend that benefits from a long-term structural tailwind.
Themes evolve continuously over time, and their returns can’t be easily explained by traditional country, sector, or style factors. Examples include technological developments, long-term demographic change, energy efficiency and automation, among others.
Can perform well:
When investors recognise the importance of the relevant long-term theme. This can, but not always, prove supportive even during falling markets because the relevance of a theme to investors still persists.
By their very nature, some themes can take a long time to play out.
Can lag:
In the immediate aftermath of a recession as markets begin to recover. Other strategies might have stronger recovery potential – at least initially.
Returns from a low correlation strategy are less likely to be influenced by traditional equity and bond market returns. The patterns of returns should therefore be independent, ‘less coincidental’ with those of traditional markets, and, using our own definition, less volatile.
Including a low correlation strategy alongside exposure to more traditional markets can help to diversify sources of return and risk.
Can perform well:
Ideally, in relative terms, when compared to traditional equity and bond markets, a low correlation strategy will hold up better in poor market conditions, and when market conditions are volatile.
Can lag:
When traditional markets generate strong returns.
At times of extreme market stress, correlation of returns between different types of investment strategy, and between different asset classes, can suddenly move towards 1. At times like these, low correlation strategies are still likely to generate negative returns.
The portfolio manager has strong views on markets and can implement these by making significant changes to the portfolio’s asset allocation and investment style. Once implemented, a strong bias towards a particular investment style and / or asset allocation positioning may persist for long periods, before being changed in favour of another.
The portfolio manager’s prevailing style bias and asset allocation positioning has the potential to magnify returns – both positively – during periods when market investors favour that particular style or asset allocation, and negatively, when they don’t.
The portfolio manager has views on markets and can implement these by making moderate changes to the portfolio’s asset allocation and investment style. Once implemented, a moderate tilt towards a particular investment style and / or asset allocation positioning may persist for long periods, before being changed in favour of another.
The portfolio manager’s prevailing style bias and asset allocation positioning has the potential to impact returns (although not aggressively so) – both positively – during periods when market investors favour that particular style or asset allocation, and negatively, when they don’t.
However, the portfolio is likely to retain constant exposure to different investment styles, and in between implementing moderate style tilts, the default position will generally be to blend them.
The performance from holdings with idiosyncratic return profiles can sometimes be out of sync with those of traditional equity and bond market returns. For example, the direction of returns can be contagious between investment trusts exposed to a particular industry subset when corporate activity impacts one of the investment trusts in that sector. This may be down to a company in a sector being bid for, merger activity, or a shift in sentiment towards that sector. Shares in individual investment trusts can also be impacted by wind-ups and other actions.
Therefore, performance patterns from holdings with idiosyncratic return profiles aren’t always explained by the direction of broader markets.
Can perform well:
Idiosyncratic returns can sometimes generate a positive return when traditional markets fall. Whether they do or not isn’t predictable and can depend on whether corporate activity or investor sentiment towards a particular industry subset is positive at the time. Assuming
Can lag:
Idiosyncratic holdings can generate negative returns when investor sentiment towards a particular investment trust or industry subset sours. If this occurs when traditional markets are already falling, it can exaggerate the extent of a portfolio’s downside risk.
Unlike our definition for low correlation strategies (see above), patterns of returns can still be influenced by traditional markets.
Like value investors, margin of safety investors believe that a company’s intrinsic value can be determined by using mathematical techniques such as discounted cash flow analysis. If the calculated intrinsic value is greater than the current market value of a company’s shares, then the shares represent a buying opportunity. A margin of safety is applied so that shares are only purchased when they’re at a certain level below their intrinsic value, and then sold when the share price increases to achieve the intrinsic value.
Typically, shares in companies with ‘value-style’ characteristics exhibit a low price to earnings ratios (P/E ratio), low price to sales ratios, and they often generate higher dividend yields when compared to the market average. However, ‘margin of safety’ investors may also include companies that have ‘growth-style’ characteristics and above average growth prospects if the manager considers them to be cheap relative to their own histories.
Unlike passive investors, and like value investors, margin of safety investors don’t believe that stock markets behave efficiently.
Over the longer term, the portfolio’s equity allocation shows a general bias towards giant companies – although intermittently, this may not always be the case. These are the very largest companies in an equity index.
In a global context many of these companies can be found in the US.
Over the longer term, the portfolio’s equity allocation shows a general bias towards larger capitalised companies. However, intermittently, this might not always be the case.
Over the longer term, the portfolio’s equity allocation shows a general bias towards larger capitalised companies and, to a lesser extent medium sized companies. However, intermittently, this might not always be the case.
Over the longer term, the portfolio’s equity allocation shows a general bias towards larger and medium sized capitalised companies. However, intermittently, this might not always be the case.
Over the longer term, the portfolio’s equity allocation shows a general bias towards medium sized companies and, to a lesser extent larger sized companies. However, intermittently, this might not always be the case.
Over the longer term, the portfolio’s equity allocation shows a general bias towards medium sized companies and, to a lesser extent smaller sized companies. However, intermittently, this might not always be the case.
Over the long term, the portfolio’s equity allocation can invest in all sizes of company – including those that are giant-sized, large, medium as well as small. This is sometimes known as a ‘multi-cap’ approach.