Long term growth / Volatility corridor / Passive / Static asset allocation
Long term growth / Volatility corridor / Passive / Static asset allocation
Long term growth / Volatility corridor / Passive / Static asset allocation
Long term growth / Volatility corridor / Passive / Static asset allocation
Long term growth / Volatility corridor / Passive / Static asset allocation
Long term growth / Volatility corridor
Long term growth / Volatility corridor
Long term growth / Volatility corridor
Long term growth / Volatility corridor
Long term growth / Volatility corridor
Long term growth
Long term growth / Natural income / Rising income / Retirement income
Long term growth / Volatility corridor / Thematic / Non Labelled but Disclosed for SDR
Long term growth / Volatility corridor / Thematic / Non Labelled but Disclosed for SDR
Long term growth / Volatility corridor / Thematic / Non Labelled but Disclosed for SDR
Long term growth / Volatility corridor / Thematic / Non Labelled but Disclosed for SDR
Long term growth / Volatility corridor / Thematic / Non Labelled but Disclosed for SDR
Positive return bias > 3 - 5 years / Low correlation
Long term growth / Natural income / Rising income / Retirement income
Long term growth
Long term growth
Long term growth
Positive return bias > 3 - 5 years / Volatility ceiling
Positive return bias > 3 - 5 years / Volatility ceiling
Positive return bias > 3 - 5 years / Volatility ceiling
Positive return bias > 3 - 5 years / Volatility ceiling
Positive return bias > 3 - 5 years / Natural income / Volatility ceiling
Positive return bias > 3 - 5 years / Volatility ceiling
Long term growth / Volatility corridor
Long term growth / Volatility corridor
Long term growth
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.
Positive return bias > 3 – 5 years
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.
Positive return bias < 3 years
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.
High income
The portfolio manager must demonstrate a strong commitment to delivering a sustainably high level of income for investors over the longer term and throughout different market conditions. The income yield is likely to be around 4% a year or higher in today’s market. Typically, income is paid quarterly or monthly.
The portfolio manager is likely to include higher yielding sources of income, and the income payments made during the year (known as the interim distributions) are likely to be variable in size. A balancing income payment (known as the final distribution) is also made at the end of every accounting year.
The total level of income paid in the accounting year (interim plus final distributions) is likely to vary from one year to the next.
Having ‘income’ in the portfolio’s name or income simply being a by-product of the investment process is not sufficient to qualify.
Natural income
The portfolio aims to distribute a level of income that is derived naturally from its underlying investments. Typically, income is paid monthly or quarterly.
The portfolio manager is unlikely to chase higher yielding sources of income, and the income payments made during the year (known as the interim distributions) can either be of equal or variable size – depending upon the portfolio manager’s process. A balancing income payment (known as the final distribution) is also made at the end of every accounting year.
The total level of income paid in the accounting year (interim plus final distributions) is likely to vary from one year to the next.
Having income in the portfolio’s name or income simply being a by-product of the investment process is not sufficient to qualify.
Rising income
The portfolio aims to distribute a level of income that is derived naturally from its underlying investments. The portfolio manager expects that the total income paid during the accounting year period will rise over the years, but the process used is not specifically tailored to ensure that this will happen. Typically, income is paid monthly or quarterly.
The portfolio manager is unlikely to chase higher yielding sources of income, and the income payments made during the year (known as the interim distributions) can either be of equal or variable size – depending upon the portfolio manager’s process. A balancing income payment (known as the final distribution) is also made at the end of every accounting year.
The total level of income paid in the accounting year (interim plus final distributions) is likely to vary from one year to the next.
Retirement income
The portfolio is managed with a view to generating a rising level of income year on year from a naturally occurring stream of income. The portfolio therefore shares both rising income and natural income characteristics, but with some key differences. Typically, income is paid monthly or quarterly.
Income payments made during the year (known as the interim distributions) are of equal size providing investors with a relatively high degree of predictability as to the size of income they can expect during that year. The level of these payment is reset by the portfolio manager each year, and typically, we should expect them to rise or to stay the same relative to the previous year’s level.
A balancing payment (known as the final distribution) is also made at the end of every accounting year. This final balancing payment may be used to help lift the total year’s income level above the previous year’s total if the interim distributions have remained the same as the previous year’s.
The total level of income paid in the accounting year (interim plus final distributions) is likely to rise from one year to the next.
Whilst there is no guarantee that this will happen, we have been very careful to select portfolio managers who have an excellent record of growing income. These managers have been approved for a retirement income scenario.
Volatility ceiling
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.
Volatility corridor
The portfolio manager seeks to maintain longer-term volatility within a specified corridor of volatility that is bound by lower and upper levels. Typically, the volatility corridor is expressed either in absolute terms or as a percentage of the volatility of a stock market index.
Most volatility ceiling portfolios operate as part of a broader suite where the return from each portfolio in the suite is managed within a different volatility corridor.
Simply being ‘risk rated’ by a third party is not sufficient to qualify.
Volatility guide
The portfolio manager seeks to grow investors’ capital over the long term – and the portfolio’s strategic asset allocation policy (SAA) is a key driver of returns. In a similar way to ‘volatility ceiling’ and volatility corridor’ portfolios, the portfolio manager is able to calculate the portfolio’s expected long term volatility level using the expected returns and co-variances of returns of the asset classes in the SAA. However, in this instance, the expected volatility level is used simply as a guide rather than as a specifically targeted level of volatility.
This may give the portfolio manager greater flexibility to tolerate levels of volatility both higher and lower than the volatility guide level. Most volatility guide portfolios operate as part of a broader suite where the return from each portfolio in the suite is managed to a different volatility guide level.
Simply being ‘risk rated’ by a third party is not sufficient to qualify.
Whilst you may find the IA Sector (Investment Association Sector) filter a more familiar way to locate portfolios with similar attributes, we find that using the Outcome and Risk v Equities filters is preferable since multi asset portfolios with similar attributes can often be found across different IA sectors.
There are a range of options available that can help sustain retirement income. The options below are limited to those for when retirees wish to withdraw income from multi asset portfolios held either within or outside of pension pots.
Retirement income champions
The portfolio is managed with a view to generating a rising level of income year on year from a naturally occurring stream of income. The portfolio therefore shares both rising income and natural income characteristics, but with some key differences. Typically, income is paid monthly or quarterly.
Income payments made during the year (known as the interim distributions) are of equal size providing investors with a relatively high degree of predictability as to the size of income they can expect during that year. The level of these payment is reset by the portfolio manager each year, and typically, we should expect them to rise or to stay the same relative to the previous year’s level.
A balancing payment (known as the final distribution) is also made at the end of every accounting year. This final balancing payment may be used to help lift the total year’s income level above the previous year’s total if the interim distributions have remained the same as the previous year’s.
The total level of income paid in the accounting year (interim plus final distributions) is likely to rise from one year to the next.
Whilst there is no guarantee that this will happen, we have been very careful to select portfolio managers who have an excellent record of growing income. These managers have been approved for a retirement income scenario.
An individual multi asset fund can often have multiple style characteristics and a style shown in the list below and in the filter may be just one of a number of different styles that combine together for a given fund.
Value
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.
Growth
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.
Quality
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.
Momentum
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.
Income
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.
Blend
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.
Themes
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.
Low correlation
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.
Aligned to manager’s view
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.
Moderate style tilts
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.
Idiosyncratic
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.
Margin of safety
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.
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.
No ESG
ESG issues aren’t considered.
Exclusion
The portfolio manager operates a policy that automatically excludes certain types of company from being included in the portfolio.
Integration
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.
Positive Integration
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.
Engagement
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.
Impact
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.
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 is not intended as a firm predictor of portfolio volatility levels.
