1. Why an investment time horizon has an impact on risk
2. The importance of comparing fund performance against their fund stated objectives
3. How broad the range of risk reward objectives is within individual IA sectors
Tutors on the panel are:
Mike Hammond, Sales Director, Premier Asset Management
Simon Evan-Cook, Senior Investment Manager, Premier Multi-Asset Funds Team
PRESENTER: Hello and welcome to Akademia. In this unit, we’re looking at low risk capital investing, and to discuss it, I’m joined here in the studio by Mike Hammond, who is Sales Director at Premier Asset Management, and also by Simon Evan-Cook, Senior Investment Manager and part of the Multi-Asset Team at Premier. If I could come to you first, Simon, how do you define low risk investing?
SIMON EVAN-COOK: I think that’s one of the biggest questions in our industry as a whole. You know, what is risk, how do you define it? I think a good way of comparing it is if, the Inuits had hundreds of words for snow supposedly. You had obviously powdery snow, slushy snow, yellow snow, all sorts of different ways of describing effectively the same thing, and I think the investment industry needs to have the same thing, because risk can be defined and talked about in many different ways.
Now the key way we look at risk across all of our funds, regardless of the outcome they’re trying to achieve, is through the avoiding the permanent loss of capital. So that’s avoiding having money lost that you simply can’t get back. So that might be because what you buy, the quality wasn’t good enough and it becomes a company going bankrupt for example, you’re not getting that money back. Or it might be because you paid too much for an investment, and that price then falls and it will not return to the level you paid for it. That’s permanent destruction of capital. That’s what we’re looking to avoid no matter what the fund that we’re running.
Now within the industry I think it’s more commonly referred to, or risk is referring to volatility. I think that’s how people generally define risk within the industry, because it’s maybe the only way that it can be easily measured or quantified. Now, with volatility, it’s a different thing from permanent loss of capital, because price movements can be very temporary. It could be a temporary market panic, but actually there’s nothing wrong with the asset itself and it returns to the price you paid for it.
So that’s one of the confusions there, but there’s many other different ways of looking at it. But I think this chart here on slide 1 is a very good way of summing up, or talking about this, because time horizon comes into this as well. So what you might find is that what can be a low risk investment over a long period of time can be high risk in the short term. And what people across the industry, clients, advisers, ourselves, are generally trying to avoid is what you see on the one year bar there. So you see the very bottom row. That shows the worst case on the left hand side and the best case scenario in any given 12 month period from investing in UK equities, gilts or cash. And what you can see there is really a good illustration of volatility.
So in the worst year for equities you would have lost almost 60%, or the price will have dropped almost 60%. You would only have lost that if you’d have actually sold at that point. In the best year, almost 100% made from UK equities; gilts, less so. On the very worst year for gilts maybe more than 20% lost, the very best year 60%, and then cash looks lower risk as well. So you’re looking at a range of outcomes that’s very wide, and I think that’s what makes people very nervous, and that is volatility risk.
However, if you look at the top of the chart, this is rolling 23 year periods, the picture changes quite a lot. It looks like a much less risky investment. Equities funnily enough actually look like the lowest risk option there over any 23-year period. In real terms, you have never lost money in UK equities. The same is not necessarily true of gilts or of cash.
PRESENTER: And looking at these percentages across the bottom of the chart, is this an annualised figure?
SIMON EVAN-COOK: That is an annualised figure, yes, so that’s what you’d have received per year over that 23-year period. And I think this is something that gets missed quite a bit when we’re talking about investing, just how the risk profile of different assets can change as your time proceeds. So there is time risk as well. So coming back onto the definition of risk, risks differ by the time period you’re holding by. Now, with lower risk investing, what you tend to find is people are more nervous, or the investors who will be more interested in these funds are more nervous about short term or shorter term periods of time. They don’t want to see big drawdowns, big losses over a short-term period. So low volatility investing is really concerned with trying to limit those drawdowns and limit that volatility for them.
But there is another definition of risk that we’re concerned about as well, and that is relative risk. In the very obvious sense a UK equity fund has got risk in absolute terms, but it’s also relative to what UK equities have done, how you’ve done relative to that. And that’s important because that’s people’s expectations of what should be happening with their investment. So, if we do something very different to what clients are expecting from their investment, if they’re expecting it to be low volatility and we run a fund that turns out to be high volatility, then that in itself is a risk. Because even if we haven’t permanently lost capital, we might drive end clients to sell the fund at the wrong point, and thereby that action would destroy capital itself, because as soon as you’re out of that market or that fund, then you lose the ability to regain on a market price rebound.
PRESENTER: So how much of your job is managing expectations, and how much of it is actually long-term investing when you run a multi-asset fund?
SIMON EVAN-COOK: I think a lot of what good fund managers do is managing expectations. But the way or last part of the way that we’ve done that at Premier is to set the funds up clearly at the start. So we have a specific outcome for all of our funds, be that income, higher growth or what we’re talking about today, which is a lower volatility outcome. So a large part of what we do is building the funds in the first place, but then also there’s a communications effort in terms of making sure that people understand what we’re doing, making sure they understand how the fund is moving and how it should move, so that their expectations are aligned with what the fund should be and does deliver.
PRESENTER: A lot of what you’ve been talking about there, as you said it depends upon your timescale for investing. So, in terms of the products we’re going to focus on here, what are we talking about, these are longer term equity based investments?
SIMON EVAN-COOK: These are longer term products. I think if you’re looking to hold any investment for under five years, and you’re very nervous about seeing price movements, then cash is the investment for you. These will invest in markets, the funds we’re talking about, so we think five years is a sensible holding period. The way we’re judged is we’re judged on our lower risk funds over rolling three periods. We think that’s a reasonable amount of time for us to achieve the objectives that we’ve set out for that.
PRESENTER: Mike Hammond, we hear a lot of different types of lower risk funds that people are encouraged to put their money in for a long time, absolute return, lower risk, are these all the same, how do they differ?
MIKE HAMMOND: I wouldn’t say they’re the same. And I think if you take what Simon’s just talked about there in terms of single asset classes and where they fit in terms of their risk category. If you bring those into a multi-asset type environment you would generally find those in sectors like the targeted absolute return sector, and then obviously you’ve got a variety of the mixed sectors. You know, the 0-35% which is a definition around how much equity exposure you can have; the 20-60% sector; and also the 40-85% sector. So there are a number of areas and a number of sectors that low risk solutions could sit in.
But if you actually look at what does sit in those sectors, you take the absolute return sector as an example, you’ve got funds in there that have an absolute return objective over a one year period, and therefore clearly they’re going to be looking at taking a very different outlook relative to funds that are maybe being run over, as Simon said, a rolling three year period. So you’ve got a wider timeframe, so therefore you can take on slightly more risk than you can do with a one year mandate. And then of course once you go into the 20-60% sector, you’re effectively, or the 0-35% sector, you’re effectively defined by the amount of equity exposure you can have, and how much cash and fixed interest you hold.
So, within those sectors, you’re almost arguably taking further risk onboard than you would do the absolute return sector. So I would argue that across those sectors you get very different types of funds and solutions for clients.
PRESENTER: Well, how, you make it sound as if advisers can’t really rely on the IA sectors themselves to identify lower risk investments, or at the very least there’s more work that has to be done.
MIKE HAMMOND: I think, absolutely. You know, you might argue that for advisers the lower risk end of the market is arguably the highest risk for them, because it’s imperative that they do deliver on the low risk side for the client. So ultimately it is critical that IFAs and advisers do understand what the makeup of that particular fund is. So what you’ve got here is you’ve got a range of our funds. So in the far left hand corner you’ve got the Premier Multi-Asset Absolute Return Fund, which has a cash plus 2% requirement over a rolling three year period. That fund sits in the targeted absolute return sector. And then you’ve got the Premier Multi-Asset Conservative Growth Fund, which sits in the mixed 20-60% sector. So you can see they’re very much at the low risk end. The Premier Multi-Asset Conservative Growth Fund has a cash plus 3% objective over a rolling three year period, which is why it’s taking on slightly more risk than the absolute return.
However, the interesting thing is that the Premier Multi-Asset Conservative Growth Fund and Premier Multi-Asset Distribution Fund, which is the next one on the risk spectrum, actually sit in the same sector, so they are in the mixed 20-60% sector, so there is key criteria that both of those funds have to meet to deliver and to sit in that sector.
PRESENTER: So they’re both within 20% or 60% in equities, but you can get that big differentiation at the time.
MIKE HAMMOND: Yes, you can get a significant differentiation because basically those two funds have a significantly different objective. So Premier Multi-Asset Distribution Fund’s primary objective is to deliver a good level of income at outset, and to grow that income, so that’s the primary objective there, whereas Premier Multi-Asset Conservative Growth Fund is designed to give you cash plus 3% over a rolling three year period. And we also have another objective within that fund that we control the volatility so that it doesn’t have any more than 30% of the FTSE All-Share volatility.
So, again, if you look at the performance of those funds in the sectors, they’ll be very different at different times of the market. So generally speaking in a rising market Premier Multi-Asset Distribution Fund will do significantly better than the Premier Multi-Asset Conservative Growth Fund, and obviously vice versa.
PRESENTER: Now you mentioned that distribution and conservative are in this, the 20-60% category, out of interest which is global growth then given that that’s not too much further along the risk reward spectrum?
MIKE HAMMOND: The Premier Multi-Asset Global Growth Fund sits in the flexible sector. And we actually have another fund which sits in the 40-85% sector which is not shown on there, which is the Premier Multi-Asset Growth and Income Fund. And effectively what that’s showing you is, over the three year period that we’re showing there, that you’ve effectively not been paid to take the risk. So you have generated better risk-adjusted returns at the lower risk end of the spectrum.
PRESENTER: And is it easy to find out, Simon, if we should be looking at funds against their stated objectives a little bit more, how easy is it to find that information out?
SIMON EVAN-COOK: It’s reasonably easy to find out that stated objective because it’ll be on most factsheets. What is harder to do then is to judge it yourself. So judge it over the period you’re looking at, because it’s in the hands then of the fund house to decide what period to put over there, within reason, obviously within regulatory reasons, whether they show it as a chart or however. So, in terms of flexibly really understanding how that fund’s performed, it’s difficult. I think most of the comparisons seem to be done against the sector, because that’s the easiest thing to do. It’s done, you know, if you look in the back of a trade press magazine then it’s all split by sector. So people will naturally assume that they’re a similar type of fund within a sector, whereas as Mike’s just said that is patently not the case.
PRESENTER: Because you’re looking at funds the whole time, so does this mean you have to buy in a lot of specialist data and equipment to be able to track what people’s stated objectives are day in day out; it’s not freely available from a fund group in the time period you need it?
SIMON EVAN-COOK: Yes, absolutely, we have to do that. We have our own systems for analysing fund performance, which allows us to check over particular periods of interest. So if a fund says it’s going to be low volatility, will protect in down markets, then it’s important for us to check over that specific period that it’s doing what it said, and to isolate that, rather than just look at it over the last five years, which can cover a multitude of different market conditions and different performances. And also it’s very hard to check on objectives such as cash plus 3%. It’s hard to necessarily see that. Obviously you can gauge what the FTSE’s done because it’s mentioned on the radio every day, but it’s much harder with a more esoteric benchmark that’s maybe not as widely publicised.
PRESENTER: And what investments are held in a lower risk investment fund? I think we’ve got a table here of a couple of the funds that you run.
SIMON EVAN-COOK: I think probably the easiest place to start is what’s not held in there. So you won’t find a lot of the typical equities that you might find further up our risk spectrum, so in the income funds or in our global growth fund. What you’ll tend to find is conservative equities. So interestingly the equity weighting in our conservative growth fund and in our multi-asset distribution fund is not massively different. But the nature of those equities is very different. They tend to be much less volatile, much lower beta. So conservative equities would include assets such as zero dividend preference shares, there might be structured products in there which use derivatives to help cut down on volatility, and there’ll also be equities in there such as convertible bonds, which we class as equities for our purposes. All of which tend to be much less volatile than a classic FTSE 100 type equity.
Likewise we hold alternative assets in there as well. So there’ll be assets in there such as, a recent example being reinsurance fund that we held recently. Holding catastrophe bonds or similar. That was very uncorrelated with what markets are doing; it related to what was going to happen in the wider world, almost down to conditions with weather and earthquakes, but we were being paid a very high rate for owning that, because there was a long period where there were plenty of disasters. So effectively you were being paid more for taking that risk. Those rates have come down now because performance has been very good, and we’ve actually sold out of that. But the important thing was it’s not correlated with what equities are doing or what bonds or doing, it’s a different set of risks, and we considered that to be worthwhile taking. And then finally specialist bonds as well.
So one of the features you’ll find in this fund is that we are away from the classical bond areas. So gilts and a lot of the investment grade corporate bonds, because we don’t see those as being very attractive areas to be right now. We think the risk rewards are skewed heavily towards the risks and away from the rewards. So we’ve got more alternative type of bond plays in there. So that might be asset financing or asset-backed securities, as well as total return or absolute return type bond mandates in there where they can go short as well as long, and therefore manage volatility that way.
PRESENTER: And your exposure to something like alternative assets, what dictates how big; is it because they’re actually quite limited, there’s a limited amount of opportunity?
SIMON EVAN-COOK: Yes.
PRESENTER: Is that what limits you to say 25% or?
SIMON EVAN-COOK: It is exactly that, it’s the opportunity that dictates that. So it’s the opportunity of what we find go in alternatives, so alternatives is a mixed bag. So there’ll be very different assets in there purposely so that we have a different set of drivers across that entire portfolio. So if we find great opportunities in alternative assets, then we’ll add to alternative assets and that weighting will grow. Alternatively it can be dictated a little bit by what’s happening in other assets. So, in conservative equities or bonds, if suddenly you find that equities have had a huge selloff and become great value, then the opportunity afforded by equities would be greater. So you would expect to see maybe the weighting in conservative equities to rise because the opportunities are better there.
PRESENTER: All right, and Mike Hammond, we talked a little bit about what’s in a lower risk investment, but what type of investor should be considering this approach?
MIKE HAMMOND: Well, I think, as the market has, there’s been a significant increase in demand for sectors like the targeted absolute return sector, and clearly the mixed 20-60% sector is growing as well. And I think we’ve got a table here which shows, because this highlights, I mean Simon just talked about the alternative and us looking for alternatives to the bond market. We are seeing more and more advisers and wealth managers who are looking at absolute return type strategies as an alternative to bonds, and this clearly highlights the reasons why.
So what you’ve got there is you’ve got a scatter graph showing how two of our absolute return funds effectively, so the Premier Multi-Asset Absolute Return Fund and the Premier Multi-Asset Conservative Growth Fund, and where they are in terms of risk characteristics against the sterling corporate bond sector, the global aggregate credit index, and also the global bond sector as well. So you can clearly see that the risk characteristics of absolute return type strategies are giving advisers what they’re looking for from a bond-type structure, but without the concerns that they may have around the bond market going forward. So we’ve seen significant demand for that type of investor.
Clearly there are a lot of clients sitting in cash, fairly disgruntled with the returns that they’re getting from cash, and clearly looking for alternatives. The risk there is that naturally you’re going to be increasing volatility, because there is going to be some volatility within the absolute return type funds. They’re not just going to go up in a straight line, and therefore it’s all about managing clients’ expectations around what the volatility is. And clearly the further you go down the time horizon in the absolute return space, so whether it’s a one year strategy or a three year strategy in terms of delivering absolute return, will also dictate the ups and downs in terms of the volatility and the price movement of the fund.
So it’s important that the IFA, the adviser understands that side of it, and we’ll talk more about that probably a bit later. And then you’ve got, we’ve got diversification within the absolute return sector, and again that’s something that we can look at a bit later. The absolute return sector is awash of different types of strategies using different methods to manage portfolios. So there are advisers that are looking to build absolute return type strategies, but looking for diversification within that. So that’s key. And then I think in terms of the clients, pensions freedoms has actually created a lot of opportunity for low risk type investments as well.
So there are a number of advisers that are looking at pensions as an IHT planning tool, and therefore they’re looking to protect their pension pot. And obviously a low risk solution is ideal for that type of client, where they’re just trying to protect the real value of that pension so that they can pass on to their dependents. And we’re also seeing a lot of advisers in a drawdown environment looking for the income to be driven out of a lump of capital in the early years, and clearly a low risk strategy for those types of clients is ideal.
PRESENTER: And we have done already a programme on the importance of how you take your income on Akademia, so do please have a look at that because I think we cover that in quite a lot of detail.
MIKE HAMMOND: Yes absolutely. So there are a lot of types of clients where low risk solutions should be part of their portfolio. And just finally I think even when an IFA is looking at the strategy of absolute return type funds, and also conservative growth. Our conservative growth fund for example sits in the 20-60% sector. So therefore as a result of that it does mean that there is the potential for that fund to throw of some income, because it does hold cash and fixed interest, whereas our absolute return fund that sits in the targeted absolute return sector, that is designed so that we don’t produce an income.
So therefore if you’ve got higher rate higher taxpayers that are just looking for a capital return and no income, then clearly you can find strategies out there that will deliver that for you as well.
PRESENTER: What we’re talking about here, what would you say to someone who said well this is all very well, but these are products that are now coming to the market essentially because bond markets are looking quite toppy; a few years’ time, there’s been a crash in the bond market, we’ll all go back to buying the traditional low risk assets called bonds. What would you say to them?
MIKE HAMMOND: Well I would say that there are some absolute return funds that have been around for a long time, and certainly if you look at our multi-asset absolute return that was launched in 2009. Conservative growth was launched prior to that as well. So they have been through some market cycles. And I think as a strategy they will work within client portfolios. So even in an environment where bonds, if we get to a scenario where bond markets do capitulate and therefore people start buying back into the bond market, there’s no reason why an absolute return strategy wouldn’t work alongside that.
PRESENTER: And it should maintain the similar risk-reward characteristics to those which we saw a little earlier on the graph.
MIKE HAMMOND: Yes, no reason why not.
SIMON EVAN-COOK: And from an investment manager’s perspective then that suddenly makes bonds interesting to us again, and then we can begin to use those more extensively within the absolute return or the low risk funds. So I think there’s no need for it to be an either/or. I think investors can use one beside the other, and we as investors within a fund can start to use those assets again.
PRESENTER: Well sticking with this theme of looking at low risk capital investing, Simon, how do you manage, measure and assess the risks in your portfolios?
SIMON EVAN-COOK: Again I would emphasise first of all that for us risk is permanent loss of capital. So every decision we make has that as its base. As the first part of the decision, we need to assess that any asset we’re buying, any fund that we’re buying is going to return capital. It’s not going to have a nasty drawdown, a loss that we can’t make back. So, before we do anything else, before we consider any type of risk, that’s what we look at first of all. If we’re satisfied with that, then we need to look at what the volatility is going to be like.
So on a standalone basis is this going to be a low volatility asset, is it going to give investors who don’t want a lot of volatility that more comfortable ride that’s not going to make them uncomfortable by holding this fund. Or alternatively it may be that volatility is a little higher, but maybe that volatility comes at a different time, or it’s not correlated with other assets. So we can put that asset class in knowing that it will be less volatile at a time when the volatility of everything else is rising, or it’ll effectively dampen out the volatility or the market movements from something else. So there’s all sorts of ways of understanding that.
At a fund level, as Mike’s already mentioned, we judge the success or the ability or the objective of this is on whether we breach a certain ceiling that we’ve set for volatility. Now in the conservative growth portfolio that is 30% of what the All Share is doing on a volatility basis. So that’s what we’d manage our clients to expect, to be no more volatile than that. Again, as I mentioned before, volatility is not a perfect way of measuring risk, but we understand that that is how people do look at investments. It’s how they do manage their own investments and their own expectations. So we do manage it with that in mind.
PRESENTER: And it seems from what you’re saying it’s not just the return that you generate, it’s the amount of volatility with the return that’s really important.
SIMON EVAN-COOK: Absolutely, it’s how you achieve that total return. So in that respect we look at the Sharpe ratio. Certainly in our opinion that is the best way of judging the risk-adjusted returns, or the returns and the performance of a fund like this, in fact of any fund. What that does is it effectively says OK this fund has achieved this level of return here and that looks good, but how much risk, and in this case defined by volatility, how much risk did that fund manager take in achieving that return?
So if you take the example of conservative growth, over recent years because you’ve seen quite a raging bull market, conservative growth within the 20-60% sector has not looked, it’s looked quite pedestrian because it is a low risk mandate. But all of a sudden you take the last three months as a very good example, that being the three months that’s contained the concerns about China and the very steep selloff we saw then. That’s seen the conservative growth fund go from unremarkable numbers up to being straight number one first percentile in its sector over that period when you saw those drawdowns.
So we completely understand that volatility is important, and that is the outcome that we’re going for with those funds. So we do look at volatility but again I would stress that we look at volatility after we’ve made sure that any asset that we buy is not going to permanently destroy our investors’ capital.
MIKE HAMMOND: And what Simon has just pointed out there just reiterates the point around you can’t use sectors to judge the performance of funds, because here all of a sudden we’ve got a fund that’s underperformed relative to the sector during the bull market.
SIMON EVAN-COOK: Which, as an investment manager, we’re very comfortable with, because we don’t think it should be on quartile returns if that sector is a bit of a catchall sector. So when we’re looking at this we’re looking at the conservative growth being third quartile, if it’s a very steep upward market it can be fourth quartile. But as investment managers we don’t care as long as what’s in that fund is doing what it’s there to do, and as long as when markets do selloff and we’ve got the right clients in that fund, they don’t get that horrible experience of suddenly what was a great fund on the way up becoming the very worst fund on the way down.
PRESENTER: A sales director being relaxed about a fund in the fourth quartile.
MIKE HAMMOND: Absolutely, because I think one of the things that we focus on at Premier is, the key thing for us is making sure that the advisers are recommending the right fund and the right strategy for their individual clients. And whether a fund is third or fourth quartile, provided it’s in there for the right reason and it’s in that position for the right reason, then we have no issue with that. Because ultimately what we want to be able to go back to the adviser and say is we told you what would happen in a market selloff, and this is what’s happened. And therefore it’s delivered and ensured that we’ve given the right client outcome for that particular client. So this comes back to the sectors are not the only way of measuring a fund. It’s whether we are delivering against a stated outcome for that particular fund.
SIMON EVAN-COOK: And, conversely, if an adviser’s bought a product that they believe was going to be a lower risk option, and they find that product at the top of the performance tables in the 20-60% sector over the period of a bull market, they should be asking some very steep questions of that manager: why is this fund doing that? Because, to me, as a fund picker, it would worry me that actually when it came to the selloff it would do exactly the opposite. So you’ve got to know the character of the fund, and accept the periods when you think it won’t do as well as the rest of the market.
PRESENTER: So you and your multi-asset team, when you sit down with your boss as we all do once a year for assessments and so forth, you are judged purely on how all of your portfolios are doing against stated objectives. There’s nothing in it that says you’re top of the sector, you’re a hero.
SIMON EVAN-COOK: It’s all done relative to what the markets have been doing. So a fund such as the global growth fund, if you’d seen that fund absolutely underperform during a period of rising markets, then we’d be asking them some very serious questions, and rightly so. But it hasn’t done that, it’s achieved that objective. And likewise conservative growth fund, we have had absolutely no pressure from our senior managers whatsoever in terms of saying why is this fund underperforming, because they’re on exactly the same page as we are, understanding that this product has been provided to fulfil a certain outcome, and it would be wrong for that fund to be outperforming when markets are favouring a different type of investment.
PRESENTER: Now, very quickly, we’ve mentioned several times absolute return funds, and there’s quite a breadth in there. When you look at the absolute return sector, Simon, how punchy can some of the funds in that sector be? Are they all definitely low risk low return products?
SIMON EVAN-COOK: I would say not. Certainly on a volatility basis some of them are volatile. They’re much more volatile than the funds we’re running, and perhaps even as volatile as equity markets. Now again this comes down to the sector problem of it still fits the profile of what the targeted absolute return sector is looking to achieve. But in terms of how it does that it can be very different. And again you look at volatility versus the permanent loss of capital, two different types of risk. There are some funds in there that maybe are more volatile but I think they are doing the right job in terms of looking to permanently protect capital. And some in there which maybe look less volatile, but actually potentially more dangerous because the assets they’re holding are at threat of actually losing capital permanently.
So it is a mixed bag, and it is a difficult one to judge. So advisers really need to do their homework on understanding what the fund is going to do, how it’s likely to perform particularly on a volatility basis, and also the actual manager’s understanding of risk and what they understand by risk.
MIKE HAMMOND: Just to reiterate that point, Mark. There’s actually a slide next which shows the absolute return sector. And it’s just looking at, I mean we’ve got our two funds there in green and orange. But those other diamonds there represent the largest funds by fund size in the absolute return sector. And clearly you can see there’s a big difference in terms of risk and volatility across that piece. And not only that, the absolute return sector, you know, as we’ve already mentioned, there are funds in there with a one year strategy, there’s funds in there with a three year strategy, and clearly they will take more risk, and they will also operate completely different processes in terms of the way that they manage their funds. So it is a sector that you do need to do a lot of work around in terms of making sure that you understand very clearly what the objective of that fund is.
PRESENTER: Mike, we talked a lot about lower risk funds, but historically how have they done in periods of high volatility?
MIKE HAMMOND: Well interestingly when we go through periods of high volatility the first thing I always do is look at how our lower risk funds have performed. And what’s always pleasing is that to date they’ve always performed exactly as we would expect them to do so. So Simon’s already mentioned the fact that the conservative growth is top percentile over a three month period, which is great, that’s exactly what we would expect within the 20-60% sector. And if you look at multi-asset absolute return, if you look at the performance of that relative to say the market, during the course of August when we had the big selloff, the absolute return fund was off just under 1%. So it was off 0.96%, compared to the market of -5.3%.
So that is giving the sort of volatility that we would expect to see in a fund that’s got a three year mandate to deliver cash plus 2%. So I think generally speaking we’re quite happy with what we’re doing within the absolute return sector and certainly at the lower risk end of the 20-60% sector.
PRESENTER: So always look at your funds in periods of stress is a key message, what they’ve done historically.
MIKE HAMMOND: Absolutely, and if you look back through since the funds were launched as well, you’ll find exactly the same scenario as well. So we’re happy.
PRESENTER: Moving on, so bringing all of this together. How should an adviser look to identify suitable lower risk investments for their clients?
MIKE HAMMOND: Well I think we’ve sort of alluded to it already. I mean there are a significant number of lower risk type funds in the marketplace, and I think if you’re looking for a solution rather than a series of single strategy funds, then clearly you’re looking at the absolute return sector. And the one thing that’s absolutely paramount for the IFA is they need to understand what the objectives are of all of the funds within those sectors. And they need to understand and complete some really robust due diligence around those funds so that they can see that the process that the fund managers are adopting is actually a repeatable process. Because not only is it important that funds can deliver in one negative market cycle, but can that process be repeated in the next correction and the correction after that. So process around how these funds are managed is absolutely paramount, and therefore the IFA’s due diligence is key.
PRESENTER: And if an IFA is always on your case asking for more performance data, they think your funds might be right for their clients, are you happy to provide that?
MIKE HAMMOND: Yes, we offer a completely transparent and open scenario. We produce quarterly reports. We can produce attribution analysis. So anything an IFA wants in terms of our funds we’re happy to give them. We’ve had a number of research organisations in that have reviewed our funds, so we’ve got reports from independent research agencies as well that we can provide to IFAs as well.
PRESENTER: It’s all about the research and the due diligence.
SIMON EVAN-COOK: Absolutely, yes, you’ve got to find the right fund for what your client, you’ve got to find that match, and that probably means rolling your sleeves up, getting to know what the manager’s trying to do with a fund, understanding exactly how they operate, what their own attitude towards risk is. Are they just concerned about volatility or are they concerned about something else as well? Are they concerned about quartile ranking or is it more of an absolute return process? So you’ve got to understand all of these factors to really get under the skin of a fund, and therefore make sure it’s the right one for the particular client you’ve got in mind.
PRESENTER: We have to leave it there. Simon Evan-Cook, Mike Hammond, thank you both very much. And thank you for watching. Do stay with us, there’s some information coming up on learning outcomes and how you can use that as part of your structured CPD. From all of us here, goodbye for now.
In order to consider the viewing of this video as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you.
By the end of this Akademia session on low risk capital investing, you will be able to understand and describe why an investment time horizon has an impact on risk; the importance of comparing fund performance against a fund’s stated objectives; and how broad the range of risk reward objectives is within individual IA sectors. Please complete the reflective statement to validate your CPD.
This webcast is directed only at authorised financial advisers and professional investors. It is not intended for retail clients.
Source: FE Analytics, as at 31.08.2015, based on a bid-to-bid, total return, UK sterling basis. Past performance is not a guide to future returns.
This webcast expresses opinions and provides information on underlying research and analysis, which may have been acted upon by Premier Asset Management or its associates for their own purposes. This webcast is for information purposes only and does not constitute advice. Reference to any particular stock does not constitute a recommendation to buy or sell the stock. Particular stock holdings may vary due to prevailing market conditions. Holdings information is available on the fund’s factsheet, available on the Premier website, www.premierfunds.co.uk. All references to past performance are no indication of future returns.
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Reference to any particular stock does not constitute a recommendation to buy or sell the stock. This Fund will invest principally in units in collective investment schemes.