MyFolio Due Diligence Report

Transcription

1 MyFolio Due Diligence Report Quarter January 2018 This document is for investment professionals only and should not be distributed to or relied upon by retail clients. It is only intended for use in jurisdictions where the relevant investment vehicles are authorised for distribution or where no such authorisation is required.

2 About Standard Life Investments Standard Life Investments is a leading asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. As active managers, we place significant emphasis on rigorous research and a strong collaborative ethos. We constantly think ahead and strive to anticipate change before it happens, ensuring that our clients can look to the future with confidence. Standard Life Investments manages billion* on behalf of clients worldwide. Our investment capabilities span equities, fixed income, multi-asset, private markets, real estate, liquidity and private wealth. Headquartered in Edinburgh, Standard Life Investments employs more than 1,700 talented individuals. We maintain offices in a number of locations around the world including Boston, Hong Kong, Paris, London, Beijing, Sydney, Dublin and Seoul. In addition, we have close relationships with leading domestic players in Asia, including HDFC Asset Management in India and Sumitomo Mitsui Trust Bank in Japan. On 14 August 2017, Aberdeen Asset Management PLC merged with Standard Life plc to form Standard Life Aberdeen plc. In connection with the merger, Standard Life Investments and Aberdeen Asset Management are coming together under the Aberdeen Standard Investments brand to create the largest active investment manager in the UK and one of the largest investment houses globally. To find out more about Aberdeen Standard Investments, please visit *Source: Standard Life Investments, as at 30/06/2017 Our investors rank among some of the world s most sophisticated and high-profile institutions. They include pension plans, banks, mutual funds, insurance companies, fund-offund managers, endowments, foundations, charities, official institutions, sovereign wealth funds and government authorities. Contents 2 Standard Life Investments 3 MyFolio Investment Process 6 Performance Summary 7 Market Review and Outlook 8 Strategic Asset Allocation Update 9 Tactical Asset Allocation Update 10 Risk Management and Control Update 11 Fund Manager Meetings 12 Fund Changes 2 MyFolio Due Diligence Report

3 MyFolio Investment Process The MyFolio funds are managed by Bambos Hambi, Head of Fund of Funds at Standard Life Investments. Bambos is supported in the management of the MyFolio funds by a number of our key investment professionals, in the Strategic and Tactical Asset Allocation, Fund Selection and Governance functions. Strategic Asset Allocation The Strategic Asset Allocation (SAA) for the funds is determined by Standard Life Investments in consultation with Moody s Analytics, a world leader in financial risk modelling. The SAA is formally reviewed on a quarterly basis on completion of the Moody s Analytics analysis. Moody s Analytics undertake a risk/return optimisation process using the appropriate strategic asset classes as agreed with Standard Life Investments and make recommendations to Standard Life Investments as to the optimum strategic mix of those assets. The mix of assets is constrained to ensure a suitably diversified portfolio is achieved. The constrained optimisation process uses a 10 year time horizon to construct the strategic asset allocation benchmarks with the aim of generating optimal returns for each level of risk over the period. The resulting asset allocations are used to populate the asset mix pots for the MyFolio Market Funds. SAA for MyFolio Managed and Multi-Manager Funds For the two suites of active MyFolio Funds there is an additional step. Standard Life Investments believe that absolute return strategies offer a valuable source of diversification for the MyFolio Managed, Managed Income, Multi- Manager and Multi-Manager Income ranges. It should be noted that due to the asset management strategies adopted in absolute return funds, traditional long only modelling techniques are less relevant for strategic asset allocation purposes. Tactical Asset Allocation Tactical Asset Allocation (TAA) positions for each fund will be decided by the Multi-Asset Investing (MAI) Team within Standard Life Investments. The MAI Team will apply their tactical investment views to fine tune the strategic asset allocation and take advantage of shorter term opportunities. In practice this will tilt the strategic asset allocation benchmarks in the direction of favoured asset classes over the shorter term. The TAA positions implemented across the multi-asset portfolios are reviewed on a regular basis with any changes being driven by a change in recommendation from the Global Investment Group (GIG), the team that collates our House iew or by a change in the benchmark weighting in a specific asset class. The nature of the five risk based funds requires disciplined strategic risk controls consistently applied across the suite of funds, therefore the maximum TAA positions permissible within each asset class is + /- 5%. An additional risk control is also applied at defensive and growth assets level. This higher level constraint is at the same level of +/- 5%. MyFolio Due Diligence Report 3

4 Fund Selection MyFolio Market Funds Fund selection for the Market Funds is largely centred on finding suitable tracker funds to replicate the performance of the strategic asset class benchmarks. The key selection criterion is confidence in the underlying Fund Managers to deliver a low tracking error fund at a competitive price. The selection of the active real estate and active high yield bond funds follows the same process as for other active external managers with the aim of creating a well-diversified basket of assets that can act as a proxy for their respective markets. MyFolio Managed Funds The funds selected for the Managed Funds are primarily selected from the range of Standard Life Investments retail Mutual Funds. Standard Life Investments offers a wide range of quality funds across the majority of the asset classes. Where Standard Life Investments do not offer a suitable fund the Fund Manager will seek to invest in funds from the rest of the market. MyFolio Multi-Manager Funds We apply a consistent a tried and tested manager selection process to capitalise on opportunities we identify. By undertaking a combination of both quantitative and qualitative due diligence we aim to filter a large universe of funds into a select group of funds which represent best of breed solutions. Portfolio Construction From a rigorously researched position, we construct efficient, well-diversified, active portfolios with a risk/reward profile appropriate to the fund s stated mandate. In doing so, we will seek to generate superior risk-adjusted returns in a consistent manner throughout the economic cycle. Once we invest in a fund, it is continuously monitored in order to identify any changes that could impact future returns. We recognise the importance of having a strong sell discipline and therefore consider our monitoring process as important as the initial selection. Monitoring our risk exposures also allows us to highlight any unintended risks that may emerge in our portfolios, so that we can remove them before they begin to impact returns. The Fund Manager has ultimate responsibility for ensuring that any fund selected is an appropriate selection for the asset class the fund has been chosen to represent. Fund Rebalancing Standard Life Investments aim to always keep trading costs to a minimum whilst ensuring funds remain within their agreed risk parameters. Fund holdings are reviewed daily to determine what, if any, re-balancing is required as a result of market movements and cash flow. Daily re-balancing back to an exact pre-determined TAA position without any tolerance levels would, we believe, be counter productive from a cost perspective. As such we consider three key areas on a daily basis, asset allocation tolerance, portfolio tracking error and deal size to determine our dealing strategy for the fund. Asset allocation tolerance we aim to keep the daily positions of each asset class within +/- 1.25% of the TAA position Portfolio Tracking Error we aim to have a low daily tracking error relative to the default portfolio position 4 MyFolio Due Diligence Report

5 Deal size deal sizes are considered to ensure dealing costs are not disproportionately high relative to the cash allocation. Before any deals are struck we go through an iterative process that determines the most cost effective dealing strategy taking into account the above factors. We believe we add value through this process by keeping dealing costs low whilst ensuring the funds remain within their defined risk parameters. Risk Management & Control Portfolio Risk Management There is an extensive risk management infrastructure to ensure that the Fund Solution and Multi-Asset Investment Team operate within the investment framework. Risk is monitored and controlled by a combination of organisational structures and processes. There are three distinct groups engaged in the risk management process for MyFolio: Fund Solution Team undertakes risk analysis at portfolio level. On top of backward looking risk measures such as information ratios, monthly underlying holdings are received from fund groups to understand forward looking risk indicators. For all funds we own (and before purchase of a new fund), we insist on monthly portfolio holdings data by the 15th day of every month. For all investment groups that we deal with, we have arranged Non-Disclosure Agreements which are signed-off by both parties legal teams to ensure confidentiality. Investment Risk Team our Investment Risk Team works independently and are responsible for monitoring the performance and risk characteristics of all of the portfolios managed at Standard Life Investments. We utilise Industry standard systems such as RiskMetrics, SunGard APT and UBS Delta to measure and monitor risk. Investment Governance Team working independently this team is responsible for ensuring the consistency and integrity of the operation of the investment process versus specification / mandate. Company Risk Management Standard Life Investments Investment Restrictions Control Teams sole responsibility is to monitor positions within funds on a daily basis, and ensure compliance with regulatory and client-driven investment restrictions and guidelines. This team is managed independently from our asset management teams and reports to the Director of Investment Governance. MyFolio Due Diligence Report 5

6 Performance Summary Performance Growth Funds 3 mths Total Return % 12 mth Total Return % 3 yrs PA % 5 yrs PA % Launch* Total Return % Launch* PA % olatility 3 yrs Std Dev % Managed I Managed II Managed III Managed I Managed Market I Market II Market III Market I Market Multi-Manager I Multi-Manager II Multi-Manager III Multi-Manager I Multi-Manager Performance Income Funds 3 mths Total Return % 12 mth Total Return % 3 yrs PA % Launch** Total Return % Launch* * PA % olatility 3 yrs Std Dev % Managed Income I Managed Income II Managed Income III Managed Income I Managed Income Multi-Manager Income I Multi-Manager Income II Multi-Manager Income III Multi-Manager Income I Multi-Manager Income *Launch: 01 October 2010 ** Launch: 06 January 2012 Sources: Standard Life Investments, Morningstar, 31 December 2017, institutional growth and income share class performance shown in the respective tables. Standard deviation based on 36 monthly data points 6 MyFolio Due Diligence Report

7 Market Review and Outlook Market review Global equities finished 2017 in fine style, with many indices hitting all-time highs. The ongoing improvement in the world s economy and a strong corporate reporting season drove this. Sentiment also received a fillip after US President Trump signed his much-vaunted $1.5 trillion tax cut into law. As with much of the year, politics remained to the fore. This included a vote for independence in Catalonia (rejected by Madrid), the formation of the EU s first far-right government in Austria and a landslide snap election victory for Japanese Prime Minister Shinzo Abe. Meanwhile, Brexit talks progressed to the second phase after the striking of a last-minute deal. Bond markets were volatile in the final quarter of There was another interest rate hike in the US, while in the UK the Bank of England raised interest rates for the first time in more than a decade. Global government bonds did manage to deliver a small positive return. In the UK, the breakthrough in Brexit negotiations was positive for gilts. Meanwhile, the announcement that the European Central Bank would reduce its bond-buying programme more gradually than expected benefited European bonds. Corporate bonds experienced a positive quarter given the generally robust global economic environment and solid corporate earnings. UK commercial real estate delivered positive performance during the fourth quarter, concluding a relatively rewarding year for investors. Income returns remained strong, supported by robust occupational demand, while capital values also strengthened over the year. UK investment volumes held up well, still largely driven by overseas buyers. Demand for industrial assets was particularly buoyant, as favourable fundamentals and the security of long-lease income continued to attract investors. As a result, the sector delivered the strongest returns over the quarter and the year. Outlook Global equity markets enter 2018 on a sound footing. The world economy is growing at a robust rate, which is feeding into healthy corporate profits. Central banks have started to withdraw monetary stimulus, although any future moves will be measured and datadependent. Challenges remain, notably around geopolitics, the US debt ceiling and potential policy missteps. China could also slow more sharply than expected. Nonetheless, the overall the outlook is encouraging. The outlook for bonds is generally less positive. However, there is enough uncertainty to make it unlikely that government bonds will fall in value significantly. aluations in some parts of the corporate bond market are a little stretched. However, we believe that the fairly benign macroeconomic environment should provide support. UK real estate dynamics remain supportive, although we expect returns to moderate as the economy experiences weaker growth in Although Brexit negotiations progressed at the end of 2017, the full economic impact remains unknown and this will continue to affect sentiment towards UK commercial real estate. Despite this uncertainty, we expect real estate to remain attractive to investors seeking a source of sustainable income. MyFolio Due Diligence Report 7

8 Strategic Asset Allocation Update The Strategic Asset Allocation Committee Archie Struthers (Chair) Stephen Acheson Executive Director, Global Strategic Partnerships James Esland Investment Manager Bambos Hambi Head of Fund of Funds Management Iain McLeod Investment Director Eddie Middleton Head of Risk Archie is responsible for ensuring that agreed investment processes are applied by the investment teams and that investment actively is consistent with both regulatory requirements and investment guidelines. Stephen has overall responsibility for the provision of investment management services and support to the wider global Standard Life group, covering both Retail and Institutional operations. James is responsible for the Investment Management processes for Global Absolute Returns and Liability Driven Investment products. He also makes the Tactical Asset Allocation decisions for MyFolio. Bambos has overall responsibility for the portfolio management of the 25 MyFolio funds. Bambos also heads up the 10 strong Fund Solutions team. Iain is responsible for the development, technical support and promotion of the full range of Standard Life Investments retail multi funds. Eddie is responsible for two functions within Investment Governance: quantitative risk processes and investment processes. James Millard Investment Director James assists Bambos in the leadership of the Fund Solutions team that is responsible for the MyFolio suite of funds; he leads the team s commercial relationships with external fund groups. We review the Strategic Asset Allocation (SAA) for each of the MyFolio funds every quarter, with the aim of ensuring that we continue to meet investors long-term interests. At the most recent review, we made several changes to the SAA model. We added two new defensive asset classes global corporate bonds and short-dated global corporate bonds. Introducing global corporate bonds enables the MyFolio funds to access a far larger and more liquid bond universe. We also increased the allocation to absolute return bonds in risk levels (MyFolio Managed and Multi-Manager growth ranges only). These investment decisions serve to both diversify risk and to broaden each fund s range of return sources. Within the growth assets, we added global REITs as a longer-term strategic holding, believing that it is now appropriate to make these assets a permanent feature of the strategic asset mix, rather than a tactical allocation. This should provide the funds with even greater liquidity and enhanced diversification across global property markets. 8 MyFolio Due Diligence Report

9 Tactical Asset Allocation Update We continue to seek growth opportunities in the MyFolio funds alongside income in a world of low yields. Despite historically low growth, there should be cyclical opportunities as economic activity broadens out, so company profits may be sustained. Political risks have dampened but could still surprise investors, positively or negatively. In addition, monetary policy does not need to tighten aggressively as underlying inflation is restrained. As a result, we favour equity risk assets and selected high-yielding fixed income assets. We therefore made the following Tactical Asset Allocation (TAA) changes (where applicable within each risk level) during the fourth quarter. Within equities, we continue to favour European equities and we also increased the overweight position in Asia Pacific and emerging market equities. We retained the underweight allocation in UK equities, given our tactical preference for overseas equities. We introduced a modest overweight allocation to global high-yield bonds. We closed the underweight position in UK real estate and closed the overweight position in global REITs. MyFolio Due Diligence Report 9

10 Risk Management and Control Update Portfolio Risk Management Governance Fund Solutions Team Investment Risk Investment Governance Company Risk Management Investment Restrictions Control Nothing to Report Nothing to Report Nothing to Report Nothing to Report 10 MyFolio Due Diligence Report

11 Fund Manager Meetings During the quarter, the Fund Solutions Team met with the following asset managers. Fund Manager Meetings Aberdeen Standard Investments Algebris Allianz Architas AXA IM Barings Dodge & Cox Eaton ance Fulcrum GAM Investec John Hancock Investments JPMorgan Legg Mason Metropole Gestion Mirabaud Pictet PIMCO Putnam RLAM T Rowe Price anguard Jo Hambro CM MyFolio Due Diligence Report 11

12 Fund Changes MyFolio Managed Period Fund Buys Fund Sells Q I to Brookfield Global REITS (Hgd) SLI Global REIT SLI Global Short Dated Corporate Bond GBP (Hgd) SLI Global Corporate Bond GBP (Hgd) II I I I anguard UK Short-Term Inv Grade Bond SLI Corporate Bond SLI Ethical Corporate Bond SLI Global Index Linked MyFolio Market Period Fund Buys Fund Sells Q I to Amundi Index FTSE EPRA NAREIT Global anguard Global Short-Term Corp Bond Index GBP (Hgd) anguard Global Corporate Bond Index GBP (Hgd) M&G Property SLI UK Real Estate MyFolio Managed Income Period Fund Buys Sells Q I to I,II,I, III SLI Global REIT SLI Global Short Dated Corporate Bond (Hgd) SLI Global Corporate Bond (Hgd) BNY Mellon US Equity Income N Berman Emerging Markets Local Currency GBP (UnHgd) II I III, I L&G Short Dated GBP Corporate Bond Index SLI Corporate Bond SLI Ethical Corporate Bond SLI SICA Global High Yield Bond GBP (Hgd) SLI UK Real Estate SLI Investment Grade Corporate Bond MyFolio Multi-Manager Period Fund Buys Fund Sells Q I to Payden Absolute Return Bond Brookfield Global REITS (Hgd) Robeco Global Credits Short Maturity GBP (Hgd) PIMCO Global IG Credit Fund GBP (Hdg) Robeco Global Credits GBP (Hgd) I I anguard UK Short-Term Inv Grade Bond Henderson UK Property PAIF M&G Property Royal London Global Index Linked MyFolio Multi-Manager Income Period Fund Buys Fund Sells Q I to I to Payden Absolute Return Bond GBP Inc Brookfield Global REITS (Hgd) Robeco Global Credits Short Maturity GBP (Hgd) PIMCO Global IG Credit GBP (Hgd) Robeco Global Credits GBP (Hgd) Chelverton UK Equity Income I I anguard UK Short-Term Inv Grade Bond Henderson UK Property PAIF M&G Property SLI UK Real Estate Royal London Global Index Linked 12 MyFolio Due Diligence Report

13 Notes MyFolio Due Diligence Report 13

14 14 MyFolio Due Diligence Report Notes

15 If you would like to find out more about our strategies, please visit where you will find contact details for your location. isit us online standardlifeinvestments.com The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. It does not constitute an offer, or solicitation of an offer, to sell or buy any securities or an endorsement with respect to any investment vehicle. The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions. MyFolio Due Diligence Report 15

16 Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training Standard Life Aberdeen, images reproduced under licence. INBGEN_15_1515_MyFolio_Due_Diligence_Report_Q4_TCM 0118