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Old Mutual Wealth's Investment Division multi-manager investment process aims to build portfolios that seek to maximise performance and minimise risk in a continuous, virtuous circle.
We concentrate on finding the right managers for the fund. We look at the fundamental characteristics of a manager, not simply focusing on past performance. We do this by carrying out hundreds of manager interviews each year to help us identify managers who we believe can deliver strong, consistent performance in the future. We look for performance as a result of skill, not luck – because we are convinced that skilful managers are capable of delivering consistent returns.
We take great care in combining selected managers to ensure that each manager works well with others in the portfolio, seeking to minimise risk within each portfolio as a whole. This careful blending creates the opportunity for each manager to outperform in their specialist area but in a strict, risk-controlled environment.
We continually analyse and reassess our managers to ensure they remain best suited to fulfil their role in the portfolio. If their performance disappoints or a better alternative manager is identified, we are able to replace them rapidly.
IMA sectors have restrictive rules about where assets can be allocated. These funds adopt an unconstrained asset allocation approach, meaning the funds will not consistently meet the rules of any sector.
The current list of fund managers can be found in the manager profiles sales aid and details of the current asset allocations can be found in the Old Mutual spectrum funds – current asset allocations sales aid.
The funds target specific levels of volatility. Please see the Old Mutual spectrum funds – optimised asset allocation sales aid for further details.
The Old Mutual Wealth asset allocation model accounts for the tax treatment of each asset class, which can result in different allocations depending on the tax wrapper used. For example, within a gross wrapper such as an ISA or pension, interest-bearing funds can reclaim the 20% tax credit on distributions. This makes interest-bearing funds more attractive in a gross environment since they have a higher expected return. The lift in expected return results in a higher allocation by the model to this asset class rather than in a net environment and usually at the expense of property.
Multi-asset funds such as the Spectrum funds are taxed either as dividend-distributing funds or interest-distributing funds, and not as a combination of both. This removes the need for separate gross and net versions and the asset allocations of the Spectrum funds are optimised on this basis.
Over time the asset allocation split for a given portfolio changes as the constituent parts rise (or fall). Rebalancing can reinstate the original asset allocations. For a portfolio of collectives this involves buying and selling the appropriate funds. If the portfolio is outside of a tax-protected wrapper, these rebalancing trades are all classed as disposals for CGT purposes.
The Spectrum funds not only ensure the asset allocation remains current, ie reflecting the current economic outlook, but because any rebalancing is done within the fund there are no CGT implications. A potential CGT liability would only apply on disposal.
A CGT benefit does not always apply, however. In the event of an investor’s risk profile changing, for example from a five to a four, a portfolio of individual funds could, with careful calculation, be altered to effect the change in risk profile through the switching of just some of the portfolio. This could potentially result in a lower CGT liability than by switching between Spectrum funds.
It is important to remember that the main benefit of the Spectrum fund range is that they are asset-allocated MultiManager funds managed by Old Mutual Wealth's Investment Division. Any potential CGT advantages should be considered as an added benefit in certain circumstances.
The Spectrum funds are accessible across the Old Mutual Wealth product range and may be accessed online through the platform and AdviserView. The funds are available for:
The platform, including ISA, Collective Investment Account, Onshore Collective Investment Bond and the Collective Retirement Account.
Old Mutual Wealth investment bonds
Old Mutual Wealth pensions
For investors with a risk profile matching one of these levels, a bespoke portfolio can be built to match their needs across the platform using the Old Mutual Global Investors fund range or funds from the wider market.
The assumptions and model allocations used for Spectrum funds are reviewed on a quarterly basis by Towers Watson, who provide advice to Old Mutual Global Investors. The review will conclude with Towers Watson's recommendations. These could be for changes to the assumptions and allocations or simply no changes at all.
When new assumptions and model asset allocations are received from Towers Watson they are reviewed by the portfolio management team for the Spectrum funds before being presented to the Investment Committee for approval.
The MPT framework allows the team to analyse the performance benefit of changing the asset allocations, given the new assumptions. Put another way, it allows them to determine how sub-optimal the current allocations are within the new framework.
This allows a cost-benefit analysis to be conducted on the asset allocation changes, to determine whether the transaction costs of altering the asset allocations is justified by the benefit which accrues to the fund. The open-ended nature of the fund allows the asset allocations to be changed in a two-stage process:
Clearly the Spectrum funds are risk targeted and it is important that the funds deliver what has been promised in this regard. In the event that the model suggests that asset allocation changes need to be implemented to ensure that the Spectrum Fund still lies within the volatility range of the relevant platform risk level then these changes will be implemented immediately, notwithstanding point 2 above.
It is assumed that the data inputs used in the MVO tools apply for the next 10 years from the date the investment portfolio is made. It is important to note that Towers Watson is not trying to predict the likely returns, volatility or correlation over the next 12 months or even the next quarter. Such predictions are the realm of those firms using tactical asset allocations and hedge funds. That said, the assumptions are annualised in order to understand the potential for annualised losses and the statistical chances of these losses (or gains) occurring. While historic performance can inform us about possible future returns, the process does not depend on it.
Whilst the return assumptions are listed in absolute terms, it is important to remember that the differences in returns are equally if not more important than absolute return values to the optimisation process. In other words, you would expect the return from equities to be more than fixed interest, which would return more than cash.
The expected volatility assumptions are based directly on the last 15 years’ worth of monthly market data. Towers Watson will use its collective judgement to determine whether these are likely to be reasonable in the future. For example, you would normally expect a low, if not negative, correlation between cash/money markets and property. This is because higher cash returns are normally associated with lower property returns due to the higher cost of borrowing.
Asset allocation revisions are reflected shortly after they are received from Towers Watson. Towers Watson reviews the parameters and investment return assumptions used within the modelling process on a quarterly basis.
It is important to remember that whilst the theory and volatility targets underpinning both Spectrum funds and the investment tools are the same, the asset allocations for each may not be identical. This may also be the case for the impact of any changes to the underlying economic assumptions following a Towers Watson quarterly review.
Any variation will result from slight differences in the assumptions and how they are applied by the Spectrum fund managers and within the investment tools. Examples of these differences include:
Willis Towers Watson is a global consulting firm with 7,200 staff in 36 countries and with the necessary expertise to provide advice to Old Mutual Wealth on the data inputs used by the Old Mutual Wealth MVO tool. The Willis Towers Watson UK investment practice has significant experience in providing investment strategy advice to the UK’s largest institutional investors. They count among their investment clients some 40% of FTSE® 100 companies’ pension plans and many of the largest non-life insurers. The investment strategy team numbers some 50 associates with backgrounds in pensions, actuarial, finance and banking. This mix of skills means that they are able to advise on cutting-edge investment solutions. Willis Towers Watson’s investment views are developed by their Global Investment Committee, which is supported by a dedicated asset research team, and is able to leverage the knowledge of their 75-strong global manager research team.
As discussed, MPT aims to optimally allocate an investment between different assets. A quantitative tool called ‘mean variance optimisation (MVO)’ allows investors to make this allocation by considering the trade-off between risk and return. Old Mutual Wealth’s MVO tool has three main inputs (or assumptions) which are essential for producing the asset allocations for each Spectrum fund:
MVO uses this data to produce portfolio asset allocations for risk levels one to ten along the Efficient Frontier, ie the set of portfolios with an expected return greater than any other with the same or lesser risk, and less risk than any other with the same or greater return.
When Professor Harry Markowitz published his doctoral thesis ‘Portfolio Selection’ in 1952, it marked the beginning of what is known as Modern Portfolio Theory (MPT). He demonstrated that for every level of risk it is possible to construct an investment portfolio that, mathematically, delivers the maximum expected investment return. Clearly, different portfolios will generate different levels of return and expose an investor to different levels of risk. A fundamental principle of MPT is that the risk of the portfolio should be considered as a whole, not as individual assets in isolation. While individual assets do have a bearing on the overall level of risk the investor is exposed to, the correlation between the assets in the portfolio has an even greater bearing. In other words, because the price of one asset typically does not move up and down in line with the price of another, there are significant diversification benefits to be gained by including a range of different asset classes in the client’s portfolio. Such diversification reduces risk, essentially because you don’t have all your eggs in one basket.
MPT aims to build portfolios that for each given level of risk have the highest expected return – these are considered ‘efficient’ portfolios. Once identified these efficient portfolios can be graphically represented (in terms of risk and return) to demonstrate the Efficient Frontier. MPT states that portfolios that do not lie on the Efficient Frontier are inefficient. Hence, the asset allocation process should first establish the level of risk to which clients are prepared to expose their investment, and then determine a portfolio that lies on the Efficient Frontier. This forms the basis of the Old Mutual Wealth approach to portfolio building.
The purpose of the asset allocation process is to create portfolios that should behave in line with an investor’s expectations. By matching implied volatility with the investor’s attitude to risk the asset allocations aim to minimise the chances of greater downside risk than the investor is prepared to tolerate.
Spectrum funds are fully consistent with the process adopted by Old Mutual Wealth's risk profiler and asset allocation models. They are an extension of that approach. The Spectrum funds target the same volatility ranges for the respective risk levels as the platform portfolios.
Financial advisers have welcomed the guidance and supporting tools available from Old Mutual Wealth to help them in portfolio construction. By using the tools available to create client risk profiles, allocate assets and select funds, financial advisers can better ensure that the resulting portfolio remains aligned to clients’ expectations in terms of volatility and quality of underlying fund management.
Feedback from financial advisers using the platform, however, indicates a growing interest in the outsourcing of fund selection, especially in cases where those funds must represent the associated asset class.
This is for two main reasons:
Speed of rebalancing. Any changes required to asset allocation within a client’s portfolio, for example following a Towers Watson & Co (Towers Watson)* review, can only be applied quickly where discretionary investment powers are in place. Only a minority of financial advisers are regulated to provide this service, however. This means that in most cases clients’ instructions have to be obtained, delaying the adjustment of their portfolios.
Potential CGT consequences. Rebalancing activity may give rise to a disposal for capital gains tax (CGT). The Spectrum range of asset-allocated MultiManager funds provides an appealing solution for these problems. Managed by award-winning Old Mutual Global Investors, they reflect current asset allocations and avoid CGT issues by rebalancing within each fund rather than across a range of funds.
*As an input to Old Mutual Wealth’s asset allocation model, Towers Watson conducts a quarterly review of the asset class assumptions used. This review is carried out solely for Old Mutual Wealth under agreed terms of engagement and not for any third party. Towers Watson assumes no responsibility, duty of care or liability to any third party in respect of the Old Mutual Wealth asset allocation model or the Spectrum funds.
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