Bankhall Conference 2009 - Skandia


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Are traditional Cautious Managed funds still relevant?

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  • Over the next 25 minutes we’ll take a look at how traditional cautious managed funds have been run, How the introduction of Alternative Asset Classes can benefit cautious managed funds from a risk/return perspective, discuss what we believe at SIG to be the four pillars needed for a truly multi-asset Fund and then spend a few moments on our Diversified fund.
  • Firstly, how are Cautious Managed Funds defined? This is the IMA’s definition for funds that fall into the Cautious Managed sector. As you can see, there’s a maximum limit on the equity exposure and a provision regarding the minimum level of fixed interest to be held. This is ultimately designed so clients can expect relatively low volatility from their investment, but retain some performance expectation (this expectation will obviously vary from client to client as we well know!). Most surprising however is that there is the lack of restriction in International Equities. So how do these factors/constraints/lack of them feed into a cautious managed fund’s asset allocation?
  • By way of example, we’ll take a look at Skandia Investment Management’s Cautious fund’s asset allocation from its launch 2003, we can see that only Equities and Fixed Interest are used. At the time this was a well diversified fund based on average asset allocation of the sector, but we’re now aware of the benefits of using Alternative asset classes and we’ll be looking at these in greater detail as the presentation unfolds.
  • Another example, is the Gartmore Cautious Managed fund – taking a look at the asset allocation over a 3 year period between June 2006 – June 2009, and in common with the SIML Cautious fund, it has not had any exposure to Alternatives as part of the asset allocation. In addition, it is quite noticeable that this fund hasn’t used International Equities, so this an example of how two funds within the Cautious Managed sector can very quite significantly in terms of asset allocation.
  • LEAVE AS IS – UPDATE AS AT 31 09 09 then review QUARTERLY The variability in asset allocation gives rise to quite a staggering difference in performance, 66% between the best and worst performing funds within the Cautious Managed sector over the last 5 years This really emphasises the need for thorough due diligence when selecting funds in the Cautious Managed sector because it’s very clear that not all funds are the same.
  • LEAVE AS IS – UPDATE AS AT 31 09 09 then review QUARTERLY Differences in the sector are brought into sharp focus even over a relatively short time period, as this graph shows over the last year. 40% differential between the top and bottom is staggering, and certainly during the type of market period we’ve experienced. This is reinforced in the next slide when assessing the volatility of the funds…
  • LEAVE AS IS – UPDATE AS AT 31 09 09 then review QUARTERLY Within the sector, again there is a significant difference of 11% between the most volatile fund at 14.23% and the least at 3.89%, over the last 5 years and over the last year
  • LEAVE AS IS – UPDATE AS AT 31 09 09 then review QUARTERLY It has been very volatile indeed! So how much volatility are you and your clients willing to accept within the cautious managed sector?
  • Furthermore, how do Traditional Cautious Managed funds mitigate market down periods and volatility? We would argue that the majority use only Equities and Fixed Interest within a long-term strategic asset allocation model. There might be elements of cash, but this will on the whole be used for Efficient Portfolio Management, not investment purposes and certainly no exposure to alternative asset classes . So how do you metamorphose a traditional cautious managed fund with limited asset class exposure to a modern Multi-Asset fund?
  • A significant factor is the introduction of alternative asset classes which came about largely as result of wider investment powers under the UCITS III regime. Consequently, these types of investment are now more available for fund managers to not only help dial down risk in their portfolio’s, but also potentially add performance. A few examples of some alternative asset classes are listed here, some you may have heard of e.g. market neutral, infrastructure and water and others such as volatility and tactical possibly not. But rest assured that alternative asset classes within the retail fund arena are regulated under the UCITs III regime.
  • The main benefits of using alternatives are listed here, and key is the diversification offered by these types of investment. By looking at the markets for different ways to add performance, and at different factors which affect returns, your portfolio is then structured in a way that can best navigate ALL market conditions. Consequently, alternative asset classes offer not only low correlation to Equities and Fixed Interest, but low correlation within the alternative asset classes as well and enhancing the diversification benefit. Therefore, you’re enhancing risk control within the fund because you’re dialling down on risk without compromising on returns and thereby enhancing the efficient frontier. .
  • First is a market neutral fund run by JP Morgan…
  • Secondly this is a hedge fund replacement managed by Fulcrum…
  • LEAVE AS IS – UPDATE AS AT 31 09 09 then review QUARTERLY So we’ve looked at the benefits of adding alternatives asset class to cautious managed portfolios and this table of correlations really does drive home why they bring such diversification and enhance risk control. All correlations are low, and so provide an alternative stream of investment when used in conjunction with Equities and Fixed Interest to create a multi-asset portfolio.
  • So to summarise, we feel a fund needs exposure to all types of asset classes (not just Equities and Fixed Interest), including alternatives to be termed truly multi-asset. It should be using both long-term strategic asset allocation and but also incorporate a shot-term tactical overlay and I’ll explain this in greater detail a little later. Multi-asset should look to outperform a specific benchmark than just sector which may be diverse in terms of investment strategic, and if its seeking to control volatility then should outperform on a risk-adjusted basis, that is how much return is achieved for each unit of risk taken. Therefore, the combination of these factors should mean that the multi-asset fund is in a much better position to be flexible to meet the demands of changing market conditions,
  • So if we take a look at SIG’s 4 pillars: Manager Selection = in a sector that gives exposure to all types of asset classes, no one manager can have expertise in all areas so utilising a multi-manager solution ensures your are accessing best in class managers. SAA = this model ensures you have a long term risk adjusted outlook, especially one that is set around the sector limitations as defined by the IMA. TAA = this can help add value over the short term by adjusting your exposure to asset classes, you potentially navigate short term volatility and add incremental value. Alternatives = as shown over the last few slides, this asset class has a number of benefits for a cautious fund.
  • ANNUALLY Looking back over the past 10 years, we can see from a discrete annual performance point of view how each asset class varies in performance from one year to the next. It is therefore vital that your allocations are reviewed and updated regularly, but that you have exposure to all types of assets.
  • Revisiting this slide from earlier, we can see the features of a multi-asset fund and how this has evolved and differs from a traditional cautious managed fund.
  • To summarize, then are traditional cautious funds still relevant? We would say no, restricted in asset class exposure, rigid in terms of allocation, not modern and up to date with regulation and not fully diversified. True multi- asset should be the way in which this sector evolves.
  • ANNUALLY or as at NEW SP So I’d like to spend the remaining minutes talking about the Skandia Diversified fund, a fund that resides within the IMA Cautious Managed sector. This is a Multi-Manager fund that has a TER of 1.79%, which we believe to be very competitive.
  • MONTHLY The fund has exposure to a range of asset classes, including alternatives, and we are using TAA around a set SAA model. The SA Allocation has been created from the sector’s long-term volatility. Whereas the controlled tactical overlay has been constructed with the sector’s constraints in mind. Fixed Interest cannot be less than 30%, equities can only form 40-60%, leaving alternatives to make up a maximum of 24%. SIG will review the fund on a monthly basis to make decisions on how the fund will be allocated according to the views of its Global Asset Allocation Committee. At present we can see that the fund has been overweight equities, which have been very good for performance, underweight alternatives and neutral on Fixed Interest.
  • MONTHLY Breaking the allocations down further, we can see that the fund has exposure to International Equities (which can be broken down to regions as well) and UK Equities. We have shown the different Fixed Interest solutions, ranging from the safety of Gilts to EMD. Because all fixed interest funds are definitely not the same!
  • CHECK MONTHLY – ALLIANZ - RH The Diversified fund uses a hybrid approach, giving you access to some of the best Retail and Institutional managers, alongside manager of manager mandates. As you can see from the fixed interest and Alternative asset classes above there are some managers you will be familiar with and others inaccessible in the retail fund arena e.g. GSAM, PIMCO and Commerzbank.
  • CHECK MONTHLY And on the equity side Epoch, Marsico, MIR and FuNNex. This is because SIG uses its scale as the worlds 3 rd largest multi-manager, utilising over 35 portfolio managers and analyst to screen fund managers for its portfolios according to its 4PS process. SO we not only screen and monitor the managers within the portfolios but have a subs bench already lined up in case replacements need to be made.
  • MONTHLY – CHECK with BD about adding SINCE LAUNCH Finally the evidence The Skandia Cautious fund was launched in 2003, and so you can see the performance of the fund has been good. The fund was changed to the Skandia Diversified fund on the 15 th May 2009, and so part of the 3 month and all of the 1 month figures are based on the fund being run as I’ve described.
  • Bankhall Conference 2009 - Skandia

    1. 1. Are traditional Cautious Managed funds still relevant? Andrew Blair, SIG Head of Business Development Bankhall – 3 rd November 2009 for financial advisers only
    2. 2. Agenda <ul><li>The traditional Cautious Managed fund </li></ul><ul><li>Introduction to alternative asset classes </li></ul><ul><li>“ 4 Pillars” of a strong, modern multi-asset fund </li></ul><ul><li>Conclusion </li></ul><ul><li>Skandia Diversified fund </li></ul>
    3. 3. IMA Cautious Managed Sector <ul><li>Funds investing in a range of assets with the maximum equity exposure restricted to 60% of the fund </li></ul><ul><li>The fund will have at least 30% invested in fixed interest and cash. </li></ul><ul><li>There is no specific requirement to hold a minimum % of non UK equity within the equity limits. </li></ul><ul><li>Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles. </li></ul>Source: IMA Cautious Managed Sector definition
    4. 4. Example of a traditional Cautious Managed fund Source: Skandia Investment Group; Skandia Cautious fund asset allocation 31/03/2003
    5. 5. Example of a traditional Cautious Managed fund Source: Financial Express; Gartmore Cautious Managed fund asset allocation 30/06/2006 – 30/06/2009
    6. 6. IMA Cautious Managed Sector Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 5 years to 30 September. Bid to bid basis. Past performance is not a guide to future performance. 5 years to 30 September 2009 -10 10 20 30 40 50 60 0 Performance Percentage (%) IMA Cautious Managed 66.73% differential between best and worst performing funds +64.04% -2.69% 22.28% Sector Average 70
    7. 7. Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 1 year to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance. IMA Cautious Managed -10 -0 5 10 15 20 25 -5 Performance Percentage (%) -15 +28.56% -12.53% 7.62% Sector Average 41.09% differential between best and worst performing funds 30 1 year to 30 September 2009 IMA Cautious Managed Sector
    8. 8. Source: Lipper Hindsight IMA Unit Trust/OEIC/ Cautious Managed sectors, 5 years to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance. IMA Cautious Managed 8.13% Sector Average 14.79% 3.92% Annualised Volatility Percentage (%) 0 4 6 8 10 12 14 2 16 5 years to 30 September 2009 IMA Cautious Managed Sector
    9. 9. Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 1 year to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance. IMA Cautious Managed 0 10 15 20 25 30 5 13.46% Sector Average 27.21% 1.56% Annualised Volatility Percentage (%) 1 year to 30 September 2009 IMA Cautious Managed Sector
    10. 10. Structure of a traditional Cautious Managed fund  Exposure to Hedge Fund like strategies  Exposure to Private Equity  Exposure to Commodities  Tactical Asset Allocation  Strategic Asset Allocation  Exposure to Fixed Interest  Exposure to Equities Cautious Managed Fund
    11. 11. Introduction of Alternative Asset Classes <ul><li>Regulation expanded </li></ul><ul><ul><li>UCITS III </li></ul></ul><ul><ul><li>COLL Sourcebook </li></ul></ul><ul><li>Alternative asset classes used for investment purposes and not just Efficient Portfolio Management </li></ul><ul><li>More choice from alternative fund vehicles other than Property & BlackRock Gold & General: </li></ul><ul><ul><li>Tactical </li></ul></ul><ul><ul><li>Hedge fund </li></ul></ul><ul><ul><li>Commodities </li></ul></ul><ul><ul><li>Timber </li></ul></ul><ul><ul><li>Currency </li></ul></ul><ul><ul><li>Volatility </li></ul></ul><ul><ul><li>Water </li></ul></ul><ul><ul><li>Infrastructure </li></ul></ul><ul><ul><li>Market Neutral </li></ul></ul>
    12. 12. Benefits of Alternative Asset Classes <ul><li>Add further diversification </li></ul><ul><li>Low correlation to existing asset classes </li></ul><ul><li>Low correlation within Alternative asset classes </li></ul><ul><li>Enhance risk control across the fund </li></ul><ul><li>Aiming to provide positive risk adjusted returns </li></ul><ul><li>Strong potential to dial-down risk without reducing returns </li></ul><ul><li>Further enhances the efficient frontier </li></ul>
    13. 13. Efficient portfolio frontier For Illustrative purposes only Standard Deviation Expected Return Cautious Diversified
    14. 14. JPM Highbridge Statistical Market Neutral <ul><li>The fund aims to generate a positive return regardless of the direction of the stock market. </li></ul><ul><li>Utilises a market neutral long/short equity strategy </li></ul><ul><li>Strategy based on mathematical modelling to exploit small market inefficiencies </li></ul><ul><li>Derives returns from equities regardless of market fluctuations giving low correlation and volatility </li></ul>
    15. 15. <ul><li>Boutique asset management of former Goldman Sachs partner and Downing Street Policy Advisor Gavyn Davies </li></ul><ul><li>Designed to provide the same benefits as hedge fund investment in transparent and liquid form </li></ul><ul><li>The Fulcrum Hedge Fund Replacement is a UCITS III fund which invests in currency, equity, commodity, fixed income and credit markets in a similar manner to hedge funds. </li></ul><ul><li>Designed to outperform the overall hedge fund universe. </li></ul>Fulcrum Alternative Beta Plus
    16. 16. <ul><li>Benefits of Hedge Funds </li></ul><ul><ul><li>Superior Risk-adjusted return </li></ul></ul><ul><ul><li>Low correlation with traditional asset classes </li></ul></ul><ul><ul><li>Have an Absolute Return flavour </li></ul></ul><ul><li>Fulcrum’s Hedge Fund Replacement is: </li></ul><ul><ul><li>Much lower cost than fund of hedge fund exposure because there is only one layer of fees and does not charge a performance fee </li></ul></ul><ul><ul><li>Highly liquid </li></ul></ul><ul><ul><li>Regulated (UCITs III) </li></ul></ul><ul><ul><li>Transparent </li></ul></ul>Fulcrum Alternative Beta Plus
    17. 17. Correlations between asset classes Source: Financial Express, 30/09/1999 – 30/09/2009. Credit Suisse Tremont Hedge Fund Index, FTSE All Share Index, MSCI AC World Index, IBOXX Sterling Corporate Bond All Maturities Index & IBOXX Sterling Gilts All Maturities Index. Past performance is not a guide to future performance. 0.52 -0.07 -0.13 0.02 Gilts 0.52 0.24 0.33 0.06 Corporate Bonds -0.07 0.24 0.92 0.58 International Equities -0.13 0.33 0.92 0.43 UK Equities 0.02 0.06 0.58 0.43 Alternatives Gilts Corporate Bonds International Equities UK Equities Alternatives Asset Classes
    18. 18. What makes a Multi-Asset fund <ul><li>Exposure to all asset types, including alternatives </li></ul><ul><li>Utilising Strategic and Tactical asset allocation </li></ul><ul><li>Aims to outperform benchmark/sector on a risk adjusted basis </li></ul><ul><li>Adaptability to current market conditions </li></ul>Just changing the fund name is not enough!
    19. 19. “ 4 Pillars” of a modern Multi-Asset fund Alternative Asset Classes Providing Diversification Adding Alpha Tactical Asset Allocation Strategic Asset Allocation Minimising Client Risk Manager Selection Single Strategy v MultiManager
    20. 20. Controlled tactical asset allocation <ul><li>Strategic – limited rebalancing as based on changes to long-term risk-return expectations </li></ul><ul><li>Tactical – frequent rebalancing as short-term expectations driven by market sentiment and volatile economic conditions </li></ul><ul><li>Controlled tactical asset allocation – permits allocations around Strategic Asset Allocation to incrementally enhance risk-return profile within strictly defined limits </li></ul>
    21. 21. Diversifying asset classes Source: Financial Express, Total Return, Bid to Bid with net income re-invested, discrete years from 01/01/1999 – 31/12/2008. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up.
    22. 22. Traditional Cautious Managed fund v Multi-Asset fund        Cautious Managed Fund  Exposure to Hedge Fund like strategies  Exposure to Private Equity  Exposure to Commodities  Tactical Asset Allocation  Strategic Asset Allocation  Exposure to Fixed Interest  Exposure to Equities Multi-Asset Fund
    23. 23. <ul><li>Are traditional Cautious Managed funds still relevant? </li></ul><ul><li>Restricted in exposure to asset classes </li></ul><ul><li>Rigid in terms of changing asset allocation </li></ul><ul><li>Not using full investment powers available </li></ul><ul><li>Not fully diversified </li></ul>
    24. 24. Skandia Diversified fund Source: *Skandia Investment Group; as at 31/07/2009 1.79% TER* Key Points Objective To provide investors with long term capital growth through investment in a diversified range of asset classes UK IMA Sector Cautious Managed Type of fund Multi-Manager
    25. 25. Source: Skandia Investment Group; as at 30/09/2009 Skandia Diversified fund TAA benefits 13.00% 24% 20% 10% Alternatives 52.75% 60% 50% 40% Equities 30.00% 40% 30% 30% Bonds 4.25% 10% 0% 0% Cash Current Max Neutral Min
    26. 26. Source: Skandia Investment Group; as at 30/09/2009 Skandia Diversified fund allocation
    27. 27. Skandia Diversified fund Asset Classes and Managers Fixed Interest + Cash Alternatives Source: Skandia Investment Group; as at 30/09/2009 Morgan Stanley Commodities Fund Commerzbank UK Premia Fund JPM Highbridge Statistical Market Neutral Fund Fulcrum Alternative Beta Plus Fund Aviva Tactical Asset Allocation Fund Morgan Stanley FX Alpha RC400 Fund GSAM Sterling Liquidity Fund BlackRock Royal London GSAM JP Morgan PIMCO Inflation Linked Bond Fund M&G Optimal Income Fund Threadneedle
    28. 28. Skandia Diversified fund International Equities (Skandia Global Dynamic Equity) UK Equities Source: Skandia Investment Group; as at 30/09/2009. * Following the forthcoming departure of Dirk Enderlein from Allianz RCM, State Street have taken control of this mandate and are currently managing it passively. **Please note the Investment Adviser is Dalton Capital (Guernsey) Limited and Dalton Strategic Partnership LLP (Dalton). FuNNeX Asset Management, Inc. provides investment advice on a non discretionary basis to Dalton. Asset Classes and Managers Origin Mirabaud UBS Lazard Schroders (Skandia Global Dynamic Equity) BGI Skandia UK Best Ideas Fund Skandia UK Strategic Best Ideas Fund Acadian Epoch Bernstein QMA Marsico State Street* Argonaut Gartmore MIR FuNNeX** First State
    29. 29. Skandia Diversified fund performance Source: Financial Express, Data to 30/09/2009, bid to bid with net income reinvested. Past performance is not a guide to future performance. Skandia Cautious fund changed its name on 15 May 2009 to Skandia Diversified fund. 2nd 25.10% 5 years 2nd 2.09% 3 years 1st 15.03% 1 year 1st 24.15% 6 months 1st 15.43% 3 months 1st 4.36% 1 month Quartile Performance Skandia Diversified fund
    30. 30. Conclusion <ul><li>Cost effective solution for investors seeking long term out-performance with controlled volatility </li></ul><ul><li>Added value from diversified weighting of asset classes and manager selection </li></ul><ul><li>Flexible asset allocation between asset classes, investment styles and regions </li></ul><ul><li>Best in class managers </li></ul>
    31. 31. Important investment notes <ul><li>What you get back will depend on investment performance and is therefore not guaranteed. The value of investments and any income from them can fall as well as rise. </li></ul><ul><li>When you cash in your investment you may get back less than you invested, especially in the early years. </li></ul><ul><li>The past performance of an investment is not a guide to future investment performance. </li></ul><ul><li>You should appreciate that there are inherent risks in all types of investment. There can be no guarantee that the objectives of the funds will be achieved. </li></ul><ul><li>This Fund includes some exposure to emerging markets, which tend to be less well regulated and more volatile than more established stock markets, so increasing the potential risk to investors. </li></ul><ul><li>Where the fund enters into derivative transactions with counterparties, there is a risk that they may default on their obligations or become insolvent. </li></ul><ul><li>At times, the Fund may invest in smaller companies, which may carry a higher degree of risk and be more difficult to sell than larger companies. </li></ul><ul><li>You should remember that the real value of your investment will be reduced by inflation. </li></ul><ul><li>Where the Fund invests in securities designated in a different currency to the Fund, the value of the Fund may rise and fall purely as a result of exchange rate fluctuations. </li></ul>Skandia Investment Group is a trading name of Skandia Investment Management Limited. Skandia Investment Management Limited is authorised and regulated by the Financial Services Authority. FSA Registered Number 208543 Registered Number: 4227837 England Registered office: Skandia House, Portland Terrace, Southampton, SO14 7EJ, United Kingdom This presentation is designed for professional advisers only and should not be relied upon by existing or prospective clients of Skandia. November 2009