The Med-Ex Investment Proposition. Our Client Proposition The Med-Ex Bespoke Investment Management Service

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1 The Med-Ex Investment Proposition Our Client Proposition The Med-Ex Bespoke Investment Management Service Our investment proposition is based on offering all our clients an independent, bespoke investment management service, which is tailored to their specific goals, needs, priorities and personal circumstances. Our aim is to form a long-term relationship, based on working with each client to draw up an individual financial plan ( Lifeplan ) that will evolve as their personal needs and circumstances change over time. All the clients who subscribe to this service are offered a regular review of their investments and financial situation. The Med-Ex Investment Process The chart below shows the main stages of our investment process: Annual Review Rebalancing Financial Plan Identify client s goals, needs and priorities; personal circumstances; financial situation; time horizons; and resources (income and wealth) Risk Tolerance Timescales, experience, liquidity requirements, risk capacity and resources CLIENT / ADVISOR RELATIONSHIP Asset Allocation Investment Selection Portfolio Construction Implementation of the financial plan Investment strategy, product selection, tax wrappers SERVICE / ADMINISTRATION \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\ Review Service Clients will be offered a review at least once a year, and their portfolio rebalanced to ensure that it remains appropriate for their risk profile and objectives, taking account of any change in their personal circumstances. Page 1 of 12

2 The Financial Plan Our relationship with a client begins with a thorough fact find, in order to identify all the relevant key information. This will include: Goals, needs and priorities Risk tolerance (attitude to risk) Risk capacity (capacity for loss) Personal circumstances and any expected changes to these Time horizons Protection needs for themselves and their dependants Income and expenses Assets and liabilities Capital expenditure planned Liquidity requirements Retirement plans Tax status Investment experience Existing financial arrangements, savings and investments This information will then be used to formulate the client s financial plan and construct an appropriate investment strategy. Personal information and objectives are reviewed and updated at each review meeting, or upon notification of changes by the client, and the financial plan and investment strategy are revised as required. Investment Instruments Unit Trusts, OEICs, Investment Trusts and Exchange Traded Products To access the underlying assets, we normally favour collective open-ended investments, such as unit trusts and Open Ended Investment Companies (OEICs). These offer a much greater level of diversification to the underlying assets than most individual portfolios could otherwise access, and also enable us to benefit from the skills of dedicated investment managers working within experienced, financially sound, well-resourced investment houses. They also tend to be less complex and less volatile than closed-ended investment companies. This is because the unit price reflects the Net Asset Value (unlike an investment trust which may trade at a premium or discount to NAV), and because they are not geared. They are also generally a more cost-effective investment management solution for smaller portfolios, because of the potential for free or low-cost switching between funds, and the flat-rate trading charges levied on investment trusts. However, investment trusts do have some advantages over open-ended funds, and there are circumstances where we may use them. These could include, but are not limited to, the following: Clients with larger investment portfolios who are more experienced investors, with previous experience of investing in exchange traded stocks. Where the risk/return profile of an investment trust is appropriate for the risk profile and risk capacity of a client, it may offer additional diversification, particularly for a more speculative investor, or an income portfolio. Page 2 of 12

3 An investment trust that meets our criteria in terms of suitability and that is currently trading at a discount may offer the prospect of an enhanced return. The investment trust may offer access to an asset class that is not available via open-ended funds, such as private equity. It may also offer access to a star fund manager whose open-ended fund has closed or softclosed. An investment trust may also offer a better way to access certain asset classes, such as direct property, due to the potential liquidity issues with open-ended funds. Active versus Passive Funds We believe that markets are fundamentally inefficient, which can provide opportunities for active fund management. Accordingly, Med-Ex favours actively managed funds rather than index trackers or passive funds. We would however consider using index-tracker funds or Exchange Traded Funds (ETFs) where we believe it is in the client s best interest, or to access an asset class where we are unable to find a suitable actively managed fund. Exchange Traded Funds or Exchange Traded Commodities may also be used to access a specific index or commodity. Other than investment companies (investment trusts) and ETFs, we would not normally give advice regarding individual shares and gilts. This is because collective investment vehicles are generally more suitable for our clients, due to the diversification they can offer. Platforms For access to a wide range of funds, Med-Ex often uses fund supermarkets or platforms, including Fidelity FundsNetwork, Skandia, Cofunds, Transact, Sterling and Standard Life. This generally offers greater investment flexibility, and makes the administration of portfolios more efficient and costeffective. It is not our practice to automatically transfer a client s holdings to one particular platform. Where a new client has investments spread across several different platforms/providers, we are happy to manage their holdings where they are, unless we feel it would be in the client s interest to move them, for example to access a greater fund range, greater investment flexibility or a more advantageous charging structure. Risk Tolerance FinaMetrica There are three main aspects to risk that we need to consider when it comes to financial planning: Risk required Risk tolerance Risk capacity After reviewing a client s financial requirements, the next step is to assess their attitude to risk, or risk tolerance. This will enable us to discuss with them whether their objectives are realisable, given the likely returns of the asset classes indicated over the period for which they wish to invest, their resources and their capacity for loss. Page 3 of 12

4 Our risk analysis process is based on FinaMetrica s Personal Risk Profiling System, a scientifically validated tool for assessing an individual s financial risk tolerance. The FinaMetrica system was developed and tested in Australia over 4 years in conjunction with the University of New South Wales Applied Psychology Unit. It was launched in 1998 and has since gained international recognition as world s best practice. Med-Ex began using FinaMetrica in July 2008 in order to adopt a more sophisticated means of assessing a client s risk tolerance, as this is fundamental to our formulation of an appropriate investment strategy. It enables us to understand an individual s attitude to risk and reward, in particular their sensitivity to investment volatility. This determines the level to which the value of their investments could fall before they would begin to feel uncomfortable. Based on the outcome of the psychometric risk questionnaire, which can be taken online to provide an instant outcome, the client s Risk Tolerance Score can be mapped to one seven Risk Groups, shown below, which enables them to compare themselves to a representative sample of the adult population. The description of the relevant Risk Group shown in the report they receive provides a summary of the typical attitudes, values, preferences and experiences of people in their group, and highlights where their answers differ from how others in that Risk Group usually answer the risk tolerance questionnaire. It also shows the typical return expectations and sensitivity to volatility of people within each Risk Group. The seven Risk Groups: Risk Group Score Range No in Group 1% 6% 24% 38% 24% 6% 1% 10 Year Return Expectations expressed as a multiple of the rate of return from Bank Deposits more likely more likely more likely more likely 2.5 At least 3 more likely >3 >3 Sensitivity to Volatility Any loss For most 0% but for some 10% For some 10% but for others 20% For most 20% but for some 33% For some 20% but for most 33% For most 33% but for some 50% For some 50%, others more FinaMetrica provides historical performance reports for eleven illustrative asset allocations, with a range of risk/return profiles. A mapping of the Risk Groups for each of the eleven portfolios is shown in the table below. The FinaMetrica system also incorporates a Linking Spreadsheet, which links the percentage of growth assets in a portfolio to the risk tolerance score ranges. This shows us whether a given percentage of growth assets falls within a client s risk tolerance comfort zone, as shown in the table below: Asset Allocation Relevant Risk Groups Growth Assets Best Fit Too Much Risk Risk Tolerance Score Ranges Marginal OK Marginal Risk 1 Defensive 1,2,3 0% 0-21 n/a n/a > 35 2 Cautious 1,2,3 10% n/a > 42 3 Conservative 1,2,3 20% < > 48 Too Little Risk Page 4 of 12

5 4 Prudent 2,3,4 30% < > 54 5 Strategic 2,3,4 40% < > 60 6 Balanced 3,4,5 50% < > 66 7 Progressive 3,4,5 60% < > 73 8 Growth 4,5,6 70% < > 82 9 Dynamic 4,5,6 80% < n/a 10 Adventurous 5,6,7 90% < n/a n/a 11 Discovery 5,6,7 100% < n/a n/a Asset Allocation How we incorporate Risk Tolerance The eleven asset allocation models shown below are based on portfolio optimisation, which aims to generate the maximum potential return for a given level of risk. They are based on carefully researched analysis of long term expected returns, standard deviations and coefficient correlations across the asset classes. Portfolio Type FinaMetrica Risk Tolerance Score Defensive Cash, Fixed Interest and Absolute Return % UK Growth Equity and Property % International Growth Equity and Property % 1 Defensive Cautious Conservative Prudent Strategic Balanced Progressive Growth Dynamic Adventurous Discovery The table above indicates the optimal asset allocation for each risk-rated portfolio type. The main asset categories are Defensive (which includes cash, sovereign and corporate debt, and absolute return funds), UK Equities and International Equities. Property and Commodities are included within the growth asset allocations. Couples Clients may choose to have their portfolios rebalanced individually, or on the basis of their combined holdings, in which case it will normally be based on the asset allocation indicated by the average of their FinaMetrica scores, unless they request otherwise. Pensions will normally be based on a client s individual risk profile. Page 5 of 12

6 Clients should understand that a higher potential reward means taking a greater risk with their capital - Risk and Reward. Risk Capacity - Capacity for Loss Along with a client s risk tolerance, another important consideration is their risk capacity, or capacity for loss. This is determined by the resources that a client has available, and the potential consequences of any loss of capital or income. It is important to take into account their wealth and other investments, income and expenses, outstanding liabilities, protection needs for their family and dependants, time horizons and need for liquidity. Enhanced Suitability Questions To supplement our fact find process, we also ask clients some Enhanced Suitability Questions. These cover six topics: Their own perception of their knowledge and understanding of investments The relative importance to them that any investment products should be covered by the UK Financial Services Compensation Scheme (FSCS) How important it is for them to retain access to their investments should they require the funds for emergency purposes Their views on the incorporation of leveraged products within their portfolio, and the risks associated with this Whether it is important that we should include ethical or socially responsible investments in their portfolio How important it is that they have the ability to vary the underlying risks associated with their investments in line with changes in their personal circumstances. Cash We would always recommend that clients keep a minimum sum of cash to meet liquidity and contingency requirements. It is important that where they do not do so, they are aware of the potential consequences. We will always take a client's cash holding into account when building or rebalancing an investment portfolio. Where a client s cash holding is very large relative to the invested portfolio, we will generally only incorporate cash to a maximum of 25% of the value of the invested portfolio into the asset allocation. This is because cash may be seen as an alternative to other defensive investment instruments, such as fixed interest securities. However, it does not offer the same benefits within a portfolio in terms of correlation, and its value is likely to be eroded over time by inflation. Agreeing Objectives Once a client s risk tolerance has been established, the next step is to discuss whether the portfolio type indicated by their risk tolerance score would be likely to meet their financial goals, in terms of its expected return and/or yield over the period for which they are planning to invest. Page 6 of 12

7 Objectives may include the need to realise a known level of capital to meet identified future liabilities, such as the cost of education or university fees for children, to buy a new car or holiday, or pay off a mortgage; a need for current or future income; retirement planning; the wish to maximise returns for a given level of risk; or simply the wish to put some money by for a rainy day. A client s objectives will very often include a mixture of these, with differing timescales and levels of priority. Where it looks unlikely that the client will be able to meet all of their objectives given their resources, risk profile and timescales, we will discuss the possible options and help them to make an informed decision as to whether they wish to: a) Accept a higher level of risk, even though this could cause them to experience levels of volatility with which they may be uncomfortable (assuming they have the capacity to withstand potentially greater losses, as explained above), b) Invest more money, if possible, in order to meet their financial objectives, or c) Delay, reduce or forgo some of their goals. The next step is then to formulate a strategy to achieve their agreed objectives. The client s risk profile, personal circumstances, needs and financial objectives will be reviewed regularly, in order to ensure that their investment strategy continues to reflect their current and long-term needs and goals. Investment Selection and Portfolio Construction Once a client s financial objectives and risk tolerance have been established, and the most appropriate asset allocation agreed upon, the next step is to construct a suitable portfolio and select the funds. Normally where we are building a new portfolio, we will select funds primarily from the Med-Ex Funds Shortlist. This may not be possible for certain products, specifically certain pension and life assurance products, which may only offer access to a limited choice of funds, in which case we will research the most suitable funds from those available. Where a client has existing investments, we will not automatically switch them out of those funds and into funds that are on our funds shortlist if the existing funds they hold are equally good, and comply with our general criteria as listed below (though we will of course rebalance the portfolio in line with their risk profile and objectives, etc). The Med-Ex Funds Shortlist Med-Ex maintains a short-list of funds that have been chosen based on various criteria, including: Morningstar Analyst rating Morningstar Star rating Citywire fund manager rating Consistent performance against their benchmark and their peers Fund Manager performance, experience and tenure Financial strength, reputation and resources of the investment management group Charges Volatility Accessibility Page 7 of 12

8 The Med-Ex Funds Short-list is reviewed and updated monthly, and the market monitored in order to identify new funds/sectors. Med-Ex will also monitor any funds on the short-list which fail to adhere to our criteria, for example if they experience a prolonged period where they underperform the benchmark or if the fund manager leaves, and a decision will be made as to whether they should be replaced. Morningstar Analyst Ratings TM Old Broad Street Research is recognised as the leading qualitative investment research company in the UK retail funds market. In 2010, it was acquired by Morningstar, a leading provider of independent investment research in North America, Europe, Australia and Asia. Together they form one of the largest independent fund research teams in the UK market. In order to provide unbiased research, they do not charge fund companies to be rated, nor do fund companies commission ratings. The Morningstar Analyst Rating TM is based on a forward-looking analysis of a fund. Ratings are assigned on a five-tier scale, with three positive ratings of Gold, Silver and Bronze, a Neutral rating and a Negative rating. It is based on the analysts convictions in a fund s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. Research Methodology: The Five Pillars Morningstar evaluates funds based on five key pillars: Process What is the fund s strategy and does management have a competitive advantage enabling it to execute the process well and consistently over time? Performance Is the fund s performance pattern logical given its process? Has the fund earned its keep with strong riskadjusted returns over relevant time periods? People What is Morningstar s assessment of the manager s talent, tenure and resources? Parent What priorities prevail at the firm? Stewardship or salesmanship? Price Is the fund a good value proposition compared with similar funds sold through similar channels? The Five Tiers Gold Rating Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts highest level of conviction. Silver Rating Fund with notable advantages across several, but perhaps not all, of the five pillars strengths that give the analysts a high level of conviction. Page 8 of 12

9 Bronze Rating Fund with advantages that out-weigh the disadvantages across the five pillars and with sufficient level of analyst conviction to warrant a positive rating. Neutral Rating Fund that isn t likely to deliver standout returns but also isn t likely to significantly underperform, according to the analysts. Negative Rating Fund that has at least one flaw likely to significantly hamper future performance and that is considered by analysts an inferior offering to its peers. As at February 2014, over 67% of the funds on our shortlist have been awarded a positive Morningstar OBSR rating. Those that are not have generally been selected because they offer access to specific asset classes where Morningstar-rated funds are not available or the choice is limited, such as ethical/sri funds or other specialist funds. For these, we refer to other third party ratings agencies, such as Morningstar Star ratings and Citywire, as well as to specialist websites such as EIRIS (Ethical Investment Research and Information Service). We may use these funds in larger portfolios to offer extra diversification, where appropriate, or where a client has specific objectives. Morningstar Star Ratings The Morningstar Star ratings system is a quantitative rating system for funds, based on how well funds have performed in comparison to similar investments, after adjusting for risk and accounting for all relevant sales charges. Funds are rated over three discrete periods: three years, five years and ten years. Ratings range from 1 star to 5 stars. Within each Morningstar Category, the top 10% of investments receive 5 stars, the next 22.5% 4 stars, the middle 35% 3 stars, the next 22.5% 2 stars and the bottom 10% 1 star. The overall rating is a weighted average of the rating for all three periods. For a fund with ten years history, a 50% weighting is given to the 10-year period, 30% to the 5-year period and 20% to the 3-year period. Investments with less than three years of history are not rated. Ratings are objective, based entirely on a mathematical evaluation of past performance. Citywire Fund Manager Ratings Citywire is an independent financial publisher that has provided news, analysis and research for professional and private investors since its launch in It is 25% owned by Thomson Reuters. The Fund Manager Ratings cover the whole market, meaning that every manager is eligible for a rating. Citywire currently tracks more than 9,000 fund managers in 35 countries across more than 175 investment sectors. When calculating performance, all annual or ongoing fund charges are taken into account. Page 9 of 12

10 Citywire is the only firm exclusively to rate fund managers rather than the actual funds. Their ratings measure performance across all the funds run by a given manager. In order to be rated, a fund manager will need to beat his or her benchmark over a three-year period. Fewer than 25% of fund managers achieve a Citywire rating. Managers may be rated Citywire+, A, AA or the top AAA rating. The top 10% of managers are awarded a AAA rating, the next 20% are awarded a AA rating, the following 30% get a single A rating and the remaining 40% gain a Citywire + rating. The process, which measures risk-adjusted returns, is entirely quantitative, based on a sophisticated methodology approved by AKG, an independent actuary. Fund Selection Funds selected for a client s portfolio will be tailored to their risk profile and to their specific requirements for capital growth, income or a mixture of both. Our aim is to construct well-diversified portfolios, such that clients are not over-exposed to any particular fund, fund manager, investment house, or sector. For this reason, a maximum of 10% of the invested portfolio in any given fund is generally preferred. Where this is not achievable because of the size of the portfolio, we will often favour mixed asset or multimanager funds, or funds of funds, in order to enable us to incorporate sufficient diversification across the asset classes. Model Portfolio Templates At Med-Ex, our underlying investment proposition is based on offering a bespoke, tailor-made investment solution to accommodate each client s particular goals, needs and personal circumstances. We do not therefore operate model portfolios, which effectively shoehorn clients of similar risk profiles and objectives into pre-determined portfolios. However, in the interests of treating customers fairly, we have established a set of model portfolio templates for each of the FinaMetrica asset allocation models (Appendix 1). We use these templates as a guide, both when creating portfolios for new clients and top-up investments for existing portfolios, and when rebalancing portfolios. This helps to ensure that clients with similar risk profiles and objectives will have similar portfolios. However, an individual client s portfolio may differ from the template for various reasons, including, but not limited to, the following: The client already holds an equally good fund from the same sector and it would not be in their interest to switch it The funds indicated by the model template are not available within a particular product The client has expressed specific investment requirements, such as the wish to have exposure to ethical funds or a particular market/geographical sector Because of a given client s particular circumstances, it is felt that alternative funds with less/more volatility may be appropriate Because of a given client s particular circumstances, the funds selected within the given asset classes need to be biased more towards growth or income The Model Portfolio Templates are reviewed at least every three months, and are automatically revised if a fund is removed from our Funds Shortlist. Page 10 of 12

11 Structured Deposits Structured deposits may be used to compliment other investment holdings where appropriate. Their advantage is that they offer the relative safety of a deposit product coupled with the potential benefit of an equity investment. They may be used as part of the investment strategy for more cautious clients, or those with a lower capacity for risk, for whom it is important to preserve the initial capital invested, or as part of a larger portfolio, to add diversification or address specific objectives. This may include clients who require an investment with a pre-determined maturity date, pre-defined risk-reward parameters or a protected minimum value. They are particularly suitable for clients who want the potential to benefit from exposure to stock market investments, but who prefer to know that their original deposit will be repaid at maturity, no matter how the underlying assets perform. They can be accessed directly, or via wrappers such as Cash ISAs and SIPPS. They may be suitable for clients who: Have sufficient savings to cover unexpected expenses and emergencies, short-term needs and any debts they may have. Will not need access to the capital during the term of the plan. Want full return of their initial deposit at maturity. Want the return on their investment to be linked to stock market performance without risking their initial capital. See growth opportunities in conventionally volatile markets but are nervous about risking their capital. Want the potential to earn a higher rate of return than that on offer from traditional deposit based products, such as bank and building society accounts. A client s money can be spread across several different plans so that they will mature at different times, thus spreading the risk of stock market performance. Diversification can also be built into the portfolio by selecting plans with different underlying indices and based on different asset classes with low correlation, such as UK equities, BRIC markets and Commodities. The plans available at any given time will vary, as they are generally offered in tranches with the terms varying depending on the performance of the underlying derivatives. We only use products that are covered by the Financial Services Compensation Scheme. Structured Investments Med-Ex does not currently use other structured investment products that are not deposit based, as we believe that there are generally better, more flexible solutions available for clients who are willing to accept some risk with their capital. Page 11 of 12

12 Review and Rebalancing Process Clients investments are reviewed regularly, in order to review their needs and any changes in their personal circumstances, and to monitor investment performance against their objectives. For existing clients who already have an investment portfolio with Med-Ex, an Investment Schedule is prepared prior to each review meeting. This provides valuations and details of the funds held within the portfolio, as well as various charts giving breakdowns by asset class and by individual fund. This allows us to compare the asset allocation of an existing portfolio with the ideal asset allocation as indicated by the client s risk profile, and to make recommendations regarding any discrepancies that may be highlighted. Portfolios will be rebalanced in line with the client s risk profile, refocused to reflect a change in objectives and/or personal circumstances, and switched out of any under-performing funds. Charges For members of Med-Ex Risk & Reward, there will be no charge for the Review Service, although some investment houses and investment platforms/fund supermarkets (e.g. Fidelity FundsNetwork, Cofunds, Sterling, etc) will usually charge around 0.25% of the amounts being switched. Currently, Selestia does not charge for fund switches. Fidelity FundsNetwork also offers the option of an annual fee with free switches and no initial upload charged for clients with funds under management on their platform in excess of 45,000. Many insurance companies and pension plan providers do not levy a fund switch charge, although this can depend upon how many switches are made in a defined period. Where the rebalancing requires fund switches, funds transfer or re-registration to take place, we will explain what this means, outline the process and explain any costs/charges. We will always write to clients to let them know the process and costs of any such transactions. Med-Ex Financial Advisory Services Ltd February 2014 Page 12 of 12