MyFolio Due Diligence Report

Transcription

1 MyFolio Due Diligence Report Quarter April 2017 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. As at 31 December 2016, Standard Life Investments managed billion on behalf of clients worldwide. Our investment capabilities span equities, fixed income, real estate, private equity, multi-asset solutions, fund-of-funds and absolute return strategies. 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. Our parent, Standard Life plc, was established in A leading provider of long-term savings and investments, Standard Life floated on the London Stock Exchange in 2006 and is now a FTSE 100-listed company. Standard Life Investments launched as a separate company in 1998 and has quickly established a reputation for innovation in pursuit of our clients investment objectives. 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. A breakdown of assets under management has been provided below: Asset Class bn Equities 92.1 Fixed Income Real Estate 16.2 Private Equity 4.9 Cash Management 40.8 Other 19.2 Source: Standard Life Investments, as at 31 December 2016 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 View 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 % Volatility 3 yrs Std Dev % Market I Market II Market III Market IV Market V Managed I Managed II Managed III Managed IV Managed V Multi-Manager I Multi-Manager II Multi-Manager III Multi-Manager IV Multi-Manager V Performance Income Funds 3 mths Total Return % 12 mth Total Return % 3 yrs PA % Launch** Total Return % Launch** PA % Volatility 3 yrs Std Dev % Managed Income I Managed Income II Managed Income III Managed Income IV Managed Income V Multi-Manager Income I Multi-Manager Income II Multi-Manager Income III Multi-Manager Income IV Multi-Manager Income V * Launch: 01 October 2010 ** Launch: 06 January 2012 Sources: Standard Life Investments, Morningstar, 31 March 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 delivered robust returns in the first quarter of 2017, albeit slowing in March, on hopes that US President Trump s proposed policies would boost economic growth and lift corporate profits. As expected, the US Federal Reserve (Fed) increased interest rates. A relatively upbeat fourth-quarter results season, renewed merger and acquisition activity and growing optimism about global economic growth were also supportive. European stock markets were boosted by signs that the region s economy was improving. Business surveys hit a five-year high and consumer confidence rose too. Japanese shares were affected by worries about a change in US trade policy. The yen was stronger too, so Japanese exports were less competitive. Japanese economic, wage and company earnings data were fairly positive, however. Other Asian stocks were boosted by China s improving economy, which helps their exports. Emerging market stock markets performed well overall. Optimism surrounding Mr. Trump s election faded, and US government bond yields declined (bond prices rose) as investors sought more defensive assets. Yields on UK government bonds also fell as investors considered the downside risks related to Brexit. Global corporate bonds rallied on the improving economic backdrop. While credit investors accepted that a stronger economy meant rising interest rates, robust corporate balance sheets were deemed positive. However, optimism over global growth subsequently lessened, leaving credit slightly weaker near quarter-end. Outlook Investors face a conundrum. On the one hand, the global economy is improving, with growth and trade picking up. The risk of deflation has fallen and central banks generally remain supportive, setting a positive scene for equity markets. On the other hand, policy and politics are creating uncertainty, with a lack of clarity on the outlook for US trade and tax, and upcoming European elections. As such, a modicum of caution is warranted when making investment decisions. While we expect bond yields to gradually increase (and bond prices to fall), challenges remain. Away from President Trump s policy challenges, the US economic backdrop remains favourable and the Fed seems prepared to respond with higher rates. Meanwhile, the European Central Bank is shifting towards reducing monetary support and unwinding negative interest rates. In the UK, higher inflation is proving awkward for the Bank of England if it wants to maintain interest rates at low levels. This very fluid environment for bonds requires us to take a pragmatic approach to new information. We expect returns from the UK commercial real estate market to moderate. The amount by which property values will fall hinges on the long-term economic impact of leaving the EU. Despite our more negative outlook, UK real estate remains attractive for those seeking a source of sustainable income. UK commercial real estate made a robust start to Having fallen in 2016, UK real estate capital values turned positive, up 0.4% in January and February 2017, according to the MSCI/IPD monthly index. Sterling weakness attracted overseas investors into the asset class. 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. Following the most recent review, we made no changes to the SAA model. 8 MyFolio Due Diligence Report

9 Tactical Asset Allocation Update During the quarter, we increased exposure towards asset classes that should benefit from the improvements in global growth and the rise in inflation that we expect to see. We therefore made the following Tactical Asset Allocation (TAA) changes. Reduced our UK equities position because we prefer other global equity markets to the UK, given the uncertain outlook for the UK economy and the headwinds it continues to face after the signing of Article 50. Decreased our US equities position while still remaining overweight (versus our SAA), we preferred to allocated to other equity markets where we believe growth momentum is more favourable. Increased our overweight holding in Japanese equities this market should be more sensitive to the upturn in global growth. It also has the added diversifying benefit of being exposed to the defensive characteristics of the yen. Increased our exposure to Asia ex-japan equities intra-regional trade in Asia is growing, reducing its reliance on the US, as the region slowly acclimatises to an evolving Chinese economy. We remain underweight (versus our SAA). Increased our holding in European equities as we are increasingly positive on more cyclical growth markets, we moved from an underweight allocation to an overweight allocation relative to the SAA. Increased our position in emerging market equities as we are increasingly positive on more cyclical growth markets, we moved from an underweight allocation to overweight relative to the SAA. Furthermore, valuations remain attractive. Reduced our exposure to emerging market debt we further reduced our holdings at a point when yields were close to the bottom of their post-us election range. We remain slightly overweight versus the SAA. Further reduced our exposure to UK direct commercial real estate we continue to remain underweight in order to fund more attractive equity positions. 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 Asset Management Alger AQR Baillie Gifford Barings BNY Mellon Chelverton Comgest LionTrust M&G Mirabaud Miton Parvest PIMCO RLAM Robeco DNCA Investments GEM Eastspring EI Sturdza Fidelity First State Fulcrum Hamlin Partners Hermes Invesco Perpetual Schroder Standard Life Investments T Rowe Price THB The Boston Company Threadneedle Tokio Marine Wellington KBI GI MyFolio Due Diligence Report 11

12 Fund Changes MyFolio Market Period Fund Risk Levels Change Rationale Q No new buys or complete sales MyFolio Managed Period Fund Risk Levels Change Rationale Q No new buys or complete sales MyFolio Multi Manager Period Fund Risk Levels Change Rationale Brown Advisory US Small Cap Blend Henderson Emerging Markets Opportunities I-V I-V Purchased, reducing exposure to Blackrock US Equity Tracker and Artemis US Purchased to complement the existing Invesco Perpetual Emerging Countries exposure AQR Systematic Total Return I-V Purchased to widen exposure to absolute return funds Invesco Perpetual Global Targeted Returns I-V Purchased to widen exposure to absolute return funds Q Tokio Marine Japanese Equity T Rowe Price Dynamic Global Bond II-V I-IV Purchased to replace Blackrock Japan Equity Tracker and complement the existing active Japanese equity holding Purchased to replace BNY Melon Absolute Return Bond Hermes Asia Ex-Japan I-V Purchased to complement the existing Mirae Asia Sector Leaders BlackRock Japan Equity Tracker II-V Sold to fund the allocation to Tokio Marine Japanese Equity BlackRock US Equity Tracker I-V Sold to fund the introduction of Brown Advisory US Small Cap BNY Mellon Abs Return Bond I-IV Sold to fund the introduction of T Rowe Price Global Dynamic Bond Smith & Williamson Short Dated Corporate Bond I-III Sold to add to the existing TwentyFour Absolute Return Credit holding 12 MyFolio Due Diligence Report

13 Fund Changes MyFolio Managed Income Period Fund Risk Levels Change Rationale Q No new buys or complete sales MyFolio Multi-Manager Income Period Fund Risk Levels Change Rationale AQR Systematic Total Return I-V Purchased to widen exposure to absolute return funds Q Invesco Perpetual Global Targeted Returns I-V Purchased to widen exposure to absolute return funds T Rowe Price Dynamic Global Bond I-IV Purchased to replace BNY Melon Absolute Return Bond BNY Mellon Abs Return Bond I-IV Sold to fund the introduction of T Rowe Price Global Dynamic Bond CF Liontrust Macro Eq Income I-V Sold to increase the existing holding in Artemis Income Any additional changes to the weightings of the underlying funds were as a result of the changes in TAA carried out over the review period. MyFolio Due Diligence Report 13

14 If you would like to find out more about our strategies, please visit where you will find contact details for your location. Visit 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. 14 MyFolio Due Diligence Report

15 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, images reproduced under licence INVBGEN_15_1515_MyFolio_Due_Diligence_Report_Q1_TCM 0517