October 2012 Review prepared by Morningstar OBSR 1 Oliver s Yard, 55-71 City Road, London EC1Y 1HQ Model Portfolios for Cofunds Website Information Document
Contents 2 Page Introduction to OBSR and the Model Portfolios Introduction 3 About Morningstar OBSR 3 Model Portfolios Model Portfolio 4 - Overview 4 Model Portfolio 5 - Overview 7 Model Portfolio 6 - Overview 10 Model Portfolio 7 - Overview 13 Model Portfolios Fund Descriptions 16
Introduction to Morningstar OBSR and the Model Portfolios 3 Introduction The Model Portfolios are featured on the Cofunds website and provide advisers with an actively monitored and advised range of four Model Portfolios. Distribution Technology Ltd is the asset allocation provider and Morningstar OBSR advises upon the fund selection for the Model Portfolios, drawing from the Researched Fund Panel which is also featured on the Cofunds website. While the Model Portfolios are continuously monitored, a formal quarterly review takes place following which updated Portfolios are posted to the Cofunds website. Any suggestions for fund changes are accompanied by a document explaining the reasons for the decision. Quarterly reports explaining the performance of the Models is also made available on a quarterly basis. About Morningstar OBSR Morningstar OBSR is a research and consultancy company that specialises in providing qualitative investment research and product analysis to financial intermediaries, wrap and platform providers, life offices and investment houses. Its clients include many of the largest Independent Financial Advisers, Chartered Accountants, Insurance Companies and Investment Managers. The investment research approach has been in place since 1994 and is forward-looking in nature, which leads to a strong emphasis on the qualitative aspects of research. The aim is to recommend a relatively small number of funds that are of the highest quality and deliver risk and return outcomes that are commensurate with investment objectives. The investment research team has grown steadily and includes some of the most experienced fund researchers in the industry. They meet managers on a daily basis according to a disciplined timetable and their findings are discussed at weekly and monthly meetings. For more information about Morningstar OBSR, its people, philosophy and research approach, please visit www.morningstarobsr.co.uk. For more information about Morningstar OBSR s Fund Ratings Services, please visit www.morningstarobsr.co.uk/fundratings and www.morningstarobsr.co.uk/globalfundratings.
Model Portfolio 4 Overview 4 Key Facts Asset Allocation (Q4 2012) The Model Portfolios were established in December 2009. Asset allocation is provided by Distribution Technology Ltd. Morningstar OBSR populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitatively-driven research process. The objective is to deliver outperformance in each of the asset classes of the Portfolio over the long term. Europe ex UK 7.0 North America 9.0 Japan 5.0 Cash 5.0 UK Property 13.0 UK Corporate 27.0 UK 24.0 UK Gilts 5.0 International Bonds 5.0 Model Portfolio Q4 2012 Asset Classes % Asset Allocation Fund Cash 5 JPM Sterling Liquidity/ M&G High Interest (ISA Only*) Suggested Fund Weight MStar OBSR Rating 5 n/a UK Property 13 M&G Property Portfolio 7 n/a Threadneedle UK Property Trust 6 n/a Fixed Interest 37 UK Corporate 27 Fidelity Moneybuilder Income 7 Gold Invesco Perpetual Corporate Bond 6 Gold Kames Investment Grade Bond 7 Silver M&G Strategic Corporate Bond 7 Silver International Bonds 5 Invesco Perpetual Global Bond 5 Bronze UK Gilts 5 M&G Gilt and Fixed Interest Income 5 Bronze Equities 45 UK 24 Artemis Income 6 Gold AXA Framlington UK Select Opportunities 6 Gold BlackRock UK 6 Bronze Threadneedle UK 6 Bronze Europe Ex UK 7 Cazenove European 4 Silver Jupiter European Special Situations 3 Silver North America 9 Schroder US Mid Cap 3 Gold Threadneedle American 6 Bronze Japan 5 Schroder Tokyo 5 Gold 100 100 *For ISA investors, the M&G High Interest fund is highlighted. While the M&G High Interest fund is managed with the aim of maintaining stability of capital and providing a steady flow of income which should exceed that available from a typical building society deposit account, it should be noted that this fund carries a greater amount of risk than a deposit account.
Model Portfolio 4 Overview 5 Cash The cash portion of the Portfolio is allocated to JPM Sterling Liquidity fund (except ISA investors see below). This fund is managed with the aim of achieving a competitive level of total return that is consistent with the preservation of capital and a high degree of liquidity. Its benchmark is seven day Sterling LIBID. For ISA investors, the M&G High Interest* fund is highlighted, given that cash and money market funds are not allowable investments. This fund is not a cash proxy because it features securities such as floating rate notes and short-dated corporate bonds. The fund is also located in the IMA Corporate Bond sector. Nevertheless, the fund is managed with the aim of maintaining stability of capital and providing a steady flow of income and can be regarded as relatively low risk in nature compared to other fixed income funds. While the fund carries a greater level of risk compared to a cash deposit, it also provides scope for a higher income stream. Dividends are paid on a quarterly basis. *The fund name is changing in November 2012 to the M&G Short Dated Corporate Bond fund. Property For the property portion of the Model Portfolio, we have selected M&G Property Portfolio and Threadneedle UK Property. Both funds provide exposure primarily to the UK commercial property market. M&G Property Portfolio is managed by PruPIM, the group s well-regarded property division. The team is extremely well-resourced and we believe it is a robust offering in this asset class. Threadneedle UK Property is also managed by experienced property practitioners. The fund was launched relatively recently, in February 2007, and is differentiated in that the managers are more yield focused than others, with the result that they look to identify higher yielding assets that fall just outside the prime real estate category. Fixed Income For the UK Corporate Bond exposure, we have suggested four funds, namely Kames Investment Grade Bond, Fidelity Moneybuilder Income, Invesco Perpetual Corporate Bond and M&G Strategic Corporate Bond. These four funds, which are located in the Corporate Bond sector, have differing mandates and are managed with a range of styles. All four funds have experienced managers and teams at the helm. Fidelity Moneybuilder Income is the most conservative fund in terms of its mandate and investment approach. The manager is extremely experienced and seeks to deliver consistent, above average returns in a risk controlled manner, which he believes will lead to competitive returns over the longerterm. The Invesco Perpetual Corporate Bond fund is managed with greater flexibility by two renowned fixed income practitioners. They tend to reflect greater conviction views in this fund, which has proven relatively rewarding over time. Kames Investment Grade Bond and M&G Strategic Corporate Bond are both younger funds but are run by experienced and well-resourced managers and teams; the funds mandates have been designed to provide the managers with greater flexibility in terms of credit and duration positioning and instrument types. Furthermore, both funds use derivatives actively both for efficient portfolio management and investment purposes. The Kames fund also includes overlay strategies through which the managers look to take advantage of cross-market opportunities. For the UK Gilt exposure, we have suggested the M&G Gilt and Fixed Interest Income fund. The fund has been managed by Jim Leaviss since 1988; he is Head of Retail Fixed Interest and works closely with his colleagues as well as drawing from the significant resources of the broader fixed interest team. The fund offers investors a vehicle that is predominantly invested in Gilts and is managed to generate a total return in excess of its peer group. The approach is typically to focus on medium to long-term themes rather than to respond to short-term market movements. Equities UK Equities In the UK portion of the Portfolio, we have suggested a blend of four funds, BlackRock UK, Threadneedle UK, Artemis Income and AXA Framlington UK Select Opportunities. Artemis Income fund is located in the UK Equity Income sector while the other three funds are located in the UK All Companies sector. Through this blend of funds we are seeking to provide exposure to a range of styles and exposures: an allocation to a relatively stable core, expressed through BlackRock UK and Threadneedle UK; an allocation to an equity income fund, Artemis Income, which reflects our belief that income will be a significant portion of total return through the medium term; and finally an allocation to a higher alpha manager in the form of AXA Framlington UK Select Opportunities. The Threadneedle fund can be regarded as reasonably core in nature and it provides broad exposure to the UK equity market. The fund is managed with an awareness of the risk/reward dynamics required to provide investors with a consistent return profile that seeks to outperform the benchmark whilst retaining sufficient stock specific risk to give the potential for long-term outperformance of the index. The manager of the BlackRock UK fund also aims to provide core exposure to the UK market, seeking to generate outperformance through stock selection and to some extent by tilting the overall portfolio exposures to benefit from prevailing market conditions. Artemis Income has also been selected for this Portfolio. UK Equity Income funds typically offer a lower risk way of accessing the equity market and with the managers focus on the importance of company cash flow, this fund is no exception. Furthermore, we believe that income strategies are likely to be rewarded where the dividend is a significant element of an equity investor s total return moving forward. These funds are complemented by an allocation to AXA Framlington UK Select Opportunities, which tends to have higher risk characertistics compared to the index. The fund is managed by the very experienced Nigel Thomas and as its name suggests, it is more opportunistic in nature and provides exposure to companies from across the market cap spectrum. His thoughtful and considered approach has generated attractive relative returns for his investors over many years. European Equities In the European equity portion of the Portfolio, we have selected Cazenove European and Jupiter European Special Situations. The Cazenove fund is large cap biased and is managed in a benchmark-aware fashion while the Jupiter fund carries more risk from a relative point of view. As mentioned above, Cazenove European is managed in a benchmark-aware manner and the fund is positioned according to the manager s business cycle assessments. The manager is very experienced and his approach has worked well over the long-term. Jupiter European Special Situations is an actively managed stock-picking fund with a bias towards high quality companies. The manager pays little attention to the index in positioning the fund but is responsive to market dynamics. For the International Bond exposure, we have suggested the Invesco Perpetual Global Bond fund. The fund is managed by Michael Matthews and Stuart Edwards, who form part of the highly regarded fixed income team at Invesco Perpetual, led by Paul Causer and Paul Reed. It provides exposure to global bond markets through both corporate and sovereign issuers, although the default position is to be invested in sovereign bonds. Their investment approach is active and they look to increase the corporate bond weighting in the portfolio as and when they believe valuations to be attractive.
Model Portfolio 4 Overview 6 North American Equities In the North American portion of the Portfolio, we have suggested a combination of Threadneedle American and Schroder UK Mid Cap. The Threadneedle American fund is managed as a benchmark-aware offering that has been successful in delivering consistent relative returns over time, characteristics that unfortunately are not easily found in the IMA North American sector. The Schroder US Mid Cap fund is invested primarily and mid and smaller companies in the US market and as such can be seen as a higher risk offering. However, our view is that the manager s experience and innate risk-awareness makes this fund appropriate for use in a blend and an attractive long-term holding for US equities. Japanese Equities Schroder Tokyo has been selected for the Portfolio s Japanese equity exposure. The Schroder team has a long heritage of investing in the Japanese stock market and is very well resourced. The manager has been involved in Japanese equities since the early 1980s, and he has a pragmatic approach which has produced consistent returns over the long term.
Model Portfolio 5 - Overview 7 Key Facts Asset Allocation (Q4 2012) The Model Portfolios were established in December 2009. Asset allocation is provided by Distribution Technology Ltd. Morningstar OBSR populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitatively-driven research process. The objective is to deliver outperformance in each of the asset classes of the Portfolio over the long term. Japan 5.0 North America 11.0 Asia Pacific ex Japan 5.0 Emerging Markets 5.0 Cash 5.0 UK Property 12.0 Europe ex UK 8.0 UK 28.0 UK Corporate 21.0 Model Portfolio Q4 2012 Asset Classes % Asset Allocation Fund Cash 5 JPM Sterling Liquidity/ M&G High Interest (ISA Only*) Suggested Fund Weight MStar OBSR Rating 5 n/a UK Property 12 M&G Property Portfolio 6 n/a Threadneedle UK Property Trust 6 n/a Fixed Interest 21 UK Corporate 21 Fidelity Moneybuilder Income 6 Gold Invesco Perpetual Corporate Bond 5 Gold Kames Investment Grade Bond 6 Silver M&G Optimal Income 4 Silver Equities 62 UK 28 Artemis Income 5 Gold AXA Framlington UK Select Opportunities 6 Gold BlackRock UK 6 Bronze Schroder UK Alpha Plus 5 Gold Threadneedle UK 6 Bronze Europe Ex UK 8 Cazenove European 4 Silver Jupiter European Special Situations 4 Silver North America 11 Schroder US Mid Cap 4 Gold Threadneedle American 7 Bronze Japan 5 Schroder Tokyo 5 Gold Asia Pacific Ex Japan 5 Aberdeen Asia Pacific 5 Gold Emerging Markets 5 First State Global Emerging Markets Leaders 5 Gold 100 100 *For ISA investors, the M&G High Interest fund is highlighted. While the M&G High Interest fund is managed with the aim of maintaining stability of capital and providing a steady flow of income which should exceed that available from a typical building society deposit account, it should be noted that this fund carries a greater amount of risk than a deposit account.
Model Portfolio 5 Overview 8 Cash The cash portion of the Portfolio is allocated to JPM Sterling Liquidity fund (except ISA investors see below). This fund is managed with the aim of achieving a competitive level of total return that is consistent with the preservation of capital and a high degree of liquidity. Its benchmark is seven day Sterling LIBID. For ISA investors, the M&G High Interest* fund is highlighted, given that cash and money market funds are not allowable investments. This fund is not a cash proxy because it features securities such as floating rate notes and short-dated corporate bonds. The fund is also located in the IMA Corporate Bond sector. Nevertheless, the fund is managed with the aim of maintaining stability of capital and providing a steady flow of income and can be regarded as relatively low risk in nature compared to other fixed income funds. While the fund carries a greater level of risk compared to a cash deposit, it also provides scope for a higher income stream. Dividends are paid on a quarterly basis. *The fund name is changing in November 2012 to the M&G Short Dated Corporate Bond fund. Property For the property portion of the Model Portfolio, we have selected M&G Property Portfolio and Threadneedle UK Property. Both funds provide exposure primarily to the UK commercial property market. M&G Property Portfolio is managed by PruPIM, the group s well-regarded property division. The team is extremely well-resourced and we believe it is a robust offering in this asset class. Threadneedle UK Property is also managed by experienced property practitioners. The fund was launched relatively recently, in February 2007, and is differentiated in that the managers are more yield focused than others, with the result that they look to identify higher yielding assets that fall just outside the prime real estate category. Fixed Income For the UK Corporate Bond exposure, we have suggested four funds, namely Fidelity Moneybuilder Income, Invesco Perpetual Corporate Bond, Kames Investment Grade Bond and M&G Optimal Income. The Fidelity, Invesco Perpetual and Kames funds are located in the Corporate Bond sector while the M&G fund is located in the Strategic Bond sector. All four funds have experienced managers and teams at the helm. Fidelity Moneybuilder Income is the most conservative fund in terms of its mandate and investment approach. The manager is extremely experienced and seeks to deliver consistent, above average returns in a risk controlled manner, which he believes will lead to competitive returns over the longerterm. The Invesco Perpetual Corporate Bond fund is managed with greater flexibility by two renowned fixed income practitioners. They tend to reflect greater conviction views in this fund, which has proven relatively rewarding over time. Kames Investment Grade Bond, while a younger fund, is run by experienced and well-resourced manager and team; the fund s mandate has been designed to provide the manager with greater flexibility in terms of credit and duration positioning and instrument types. Furthermore, the fund uses derivatives actively both for efficient portfolio management and investment purposes. It also includes overlay strategies through which the manager looks to take advantage of cross-market opportunities. The M&G Optimal Income fund is strategic in nature and the manager has the ability to make significant moves between Gilts, investment grade bonds, high yield bonds and other instruments depending on where value is identified. Strategies may also be implemented through equities and derivatives. In some respects, there is greater risk in this fund (hence it features with a lower weighting) as it relies to a greater degree on the investment skill of the manager and his team but on the other hand, he also has greater flexibility to manage the risk profile of the fund according to the market environment, hence at times it may serve the purpose of reducing the risk of this portion of the Portfolio. Equities UK Equities In the UK portion of the Portfolio, we have suggested five funds, BlackRock UK, Threadneedle UK, Artemis Income, AXA Framlington UK Select Opportunities and Schroder UK Alpha Plus. Artemis Income fund is located in the UK Equity Income sector while the other four funds are located in the UK All Companies sector. Within the UK blend we are seeking to ensure an allocation to a stable core, expressed through BlackRock UK and Threadneedle UK; the allocation to Artemis Income reflects our belief that the income component will be a significant portion of total return through the medium term; and finally the balance of the UK blend is allocated to higher alpha managers in the form of AXA Framlington UK Select Opportunities and Schroder UK Alpha Plus. The Threadneedle fund can be regarded as reasonably core in nature and it provides broad exposure to the UK equity market. The fund is managed with an awareness of the risk/reward dynamics required to provide investors with a consistent return profile that seeks to outperform the benchmark whilst retaining sufficient stock specific risk to give the potential for long-term outperformance of the index. The manager of the BlackRock UK fund also aims to provide core exposure to the UK market, seeking to generate outperformance through stock selection and by tilting the overall portfolio exposures to benefit from prevailing market conditions. Artemis Income has also been selected for this Portfolio. UK Equity Income funds typically offer a lower risk way of accessing the equity market and with the managers focus on the importance of company cash flow, this fund is no exception. Furthermore, we believe that income strategies are likely to be rewarded where the dividend is a significant element of an equity investor s total return moving forward. These funds are complemented by allocations to AXA Framlington UK Select Opportunities and Schroder UK Alpha Plus, which tend to have higher risk characteristics compared to the index. The AXA Framlington fund is managed by the very experienced Nigel Thomas and as its name suggests, it is more opportunistic in nature and provides exposure to companies from across the market cap spectrum. His thoughtful and considered approach has generated attractive relative returns for his investors over many years. Schroder UK Alpha Plus is a large-cap biased fund that is very actively managed with the fund manager having an absolute return approach to investing in the sense of wishing to generate positive returns over the long-term by investing in stocks that he believes will rise in value by at least 10-20% in the ensuing three years. This approach has been rewarding although the fund is volatile in nature, hence the importance of featuring it within a blend. European Equities In the European equity portion of the Portfolio, we have selected Cazenove European and Jupiter European Special Situations. The Cazenove fund is large cap biased and is managed in a benchmark-aware fashion while the Jupiter fund carries more risk from a relative point of view. As mentioned above, Cazenove European is managed in a benchmark-aware manner and the fund is positioned according to the manager s business cycle assessments. The manager is very experienced and his approach has worked well over a number of years. Jupiter European Special Situations is an actively managed stock-picking fund with a bias towards high quality companies. The manager pays little attention to the index in positioning the fund but is responsive to market dynamics. North American Equities In the North American portion of the Portfolio, we have suggested a combination of Threadneedle American and Schroder UK Mid Cap. The Threadneedle American fund is managed as a benchmark-aware offering that has been successful in delivering consistent relative returns over time, characteristics that unfortunately are not easily found in the IMA North American sector. The Schroder US Mid Cap fund is invested primarily and mid and smaller companies in the US market and as such can be seen as a higher risk offering. However, our view is that the manager s experience and innate risk-awareness makes this fund appropriate for use in a blend and an attractive long-term holding for US equities.
Model Portfolio 5 Overview 9 Japanese Equities Schroder Tokyo has been selected for the Portfolio s Japanese equity exposure. The Schroder team has a long heritage of investing in the Japanese stock market and is very well resourced. The manager has been involved in Japanese equities since the early 1980s, and he has a pragmatic approach which has produced consistent returns over the long term. Asia Pacific ex Japan Equities In the Asia Pacific ex Japan portion of the Portfolio, we have suggested the Aberdeen Asia Pacific fund. The process is strictly bottom-up in nature and the team seeks to identify good quality companies in which they are able to achieve an in-depth understanding. High quality management is considered of critical importance and they also look for companies with growth characteristics, competitive business models, strong balance sheets and high returns on capital. Emerging Market Equities For emerging markets, we have suggested the First State Global Emerging Market Leaders fund. The First State fund is managed in line with the Group s Asian and Emerging Markets investment ethos and process, which seeks to invest in well-managed companies with sustainable business models, predictable growth and low valuations.
Model Portfolio 6 - Overview 10 Key Facts Asset Allocation (Q4 2012) The Model Portfolios were established in December 2009. Asset allocation is provided by Distribution Technology Ltd. Morningstar OBSR populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitatively-driven research process. The objective is to deliver outperformance in each of the asset classes of the Portfolio over the long term. Japan 5.0 Asia Pacific ex Japan 9.0 Emerging Markets 10.0 UK Property 6.0 UK Corporate 17.0 North America 10.0 Europe ex UK 7.0 UK 36.0 Model Portfolio Q4 2012 Asset Classes % Asset Allocation Fund UK Property 6 Suggested Fund Weight MStar OBSR Rating M&G Property Portfolio 3 n/a Threadneedle UK Property Trust 3 n/a Fixed Interest 17 UK Corporate 17 Fidelity Moneybuilder Income 7 Gold Invesco Perpetual Corporate Bond 6 Gold M&G Optimal Income 4 Silver Equities 77 UK 36 AXA Framlington UK Select Opportunities 5.5 Gold BlackRock UK 7 Bronze BlackRock UK Special Situations 5.5 Gold Investec UK Special Situations 5.5 Gold Schroder UK Alpha Plus 5.5 Gold Threadneedle UK Equity Income 7 Silver Europe Ex UK 7 Cazenove European 3.5 Silver Jupiter European Special Situations 3.5 Silver North America 10 Schroder US Mid Cap 4 Gold Threadneedle American 6 Bronze Japan 5 Schroder Tokyo 5 Gold Asia Pacific Ex Japan 9 Fidelity South East Asia 4 Silver Newton Asian Income 3 Silver Schroder Asian Alpha Plus 2 Silver Emerging Markets 10 Aberdeen Emerging Markets 5 Gold First State Global Emerging Markets Leaders 5 Gold 100 100
Model Portfolio 6 Overview 11 Property For the property portion of the Model Portfolio, we have selected M&G Property Portfolio and Threadneedle UK Property. Both funds provide exposure primarily to the UK commercial property market. M&G Property Portfolio is managed by PruPIM, the group s well-regarded property division. The team is extremely well-resourced and we believe it is a robust offering in this asset class. Threadneedle UK Property is also managed by experienced property practitioners. The fund was launched relatively recently, in February 2007, and is differentiated in that the managers are more yield focused than others, with the result that they look to identify higher yielding assets that fall just outside the prime real estate category. Fixed Income For the UK Corporate Bond exposure, we have suggested three funds, namely Fidelity Moneybuilder Income, Invesco Perpetual Corporate Bond and M&G Optimal Income. The Fidelity and Invesco Perpetual funds are located in the Corporate Bond sector while the M&G fund is located in the Strategic Bond sector. All three funds have experienced managers and teams at the helm. Fidelity Moneybuilder Income is the most conservative fund in terms of its mandate. The manager is extremely experienced and seeks to deliver consistent, above average returns in a risk controlled manner, which he believes will lead to competitive returns over the longer-term. The Invesco Perpetual Corporate Bond fund is managed with greater flexibility by two renowned fixed income practitioners. They tend to reflect greater conviction views in this fund, which has proven relatively rewarding over time. The M&G Optimal Income fund is strategic in nature and the manager has the ability to make significant moves between Gilts, investment grade bonds, high yield bonds and other instruments depending on where value is identified. Strategies may also be implemented through equities and derivatives. In some respects, there is greater risk in this fund as it relies to a greater degree on the investment skill of the manager and his team but on the other hand, he also has greater flexibility to manage the risk profile of the fund according to the market environment, hence at times it may serve the purpose of reducing the risk of this portion of the Portfolio. Equities UK Equities In the UK portion of the Portfolio, we have suggested six funds, Threadneedle UK Equity Income, BlackRock UK, AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations. Threadneedle UK Equity Income fund is located in the UK Equity Income sector while the other five funds are located in the UK All Companies sector. Within the UK blend we are seeking to ensure an allocation to a stable core, expressed through BlackRock UK; the allocation to Threadneedle UK Equity Income reflects our belief that the income component will be a significant portion of total return through the medium term; and finally the balance of the UK blend is allocated to a higher alpha managers in the form of AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations. We have selected Threadneedle UK Equity Income as we have high regard for the manager and believe that he has the ability to perform well over the long term. In practice, the fund is run for total return, but with greater emphasis on producing a strong and rising yield. This results in a pragmatic management style and is supported by the quality of Mr Harrison s top-down market insights and the team s detailed stock research. This believe that this is an interesting fund for the UK blend as we think that income strategies are likely to be rewarded where the dividend is a significant element of an equity investor s total return moving forward. The manager of the BlackRock UK fund also aims to provide core exposure to the UK market, seeking to generate outperformance through stock selection and to some extent by tilting the overall portfolio exposures to benefit from prevailing market conditions. These funds are complemented by allocations to mix of different types of funds in the form of AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations, all of which tend to have higher risk characteristics compared to the index. AXA Framlington UK Select Opportunities is managed by the very experienced Nigel Thomas and as its name suggests, it is more opportunistic in nature and provides exposure to companies from across the market cap spectrum. His thoughtful and considered approach has generated attractive relative returns for his investors over many years. BlackRock UK Special Situations fund is strongly biased towards mid and small cap companies and is based upon meticulous stock selection. He is skilled both in identifying smaller companies with potential whilst acknowledging the inherent risk in this strategy within his portfolio construction, tilting its aggregate positioning as he deems appropriate for the market conditions. Schroder UK Alpha Plus is a large-cap biased fund that is very actively managed, with the fund manager having an absolute return approach to investing in the sense of wishing to generate positive returns over the long-term by investing in stocks that he believes will rise in value by at least 10-20% in the ensuing three years. This approach has been rewarding although the fund is volatile in nature, hence the importance of featuring it within a blend. Finally, Investec UK Special Situations offers investors a reasonably diversified portfolio of UK equities, managed using the traditional principles of value investing. The fund has been managed by Alastair Mundy who is one of very few genuinely contrarian investors and the courage of his convictions has been tested at various times in the past. Investors do need to be prepared for a performance and risk outcomes that can differ from that of the market but the fund can work well within a blend as it typically provides style diversification. European Equities In the European equity portion of the Portfolio, we have selected Cazenove European and Jupiter European Special Situations. The Cazenove fund is large cap biased and is managed in a benchmark-aware fashion while the Jupiter fund carries more risk from a relative point of view. As mentioned above, Cazenove European is managed in a benchmark-aware manner and the fund is positioned according to the manager s business cycle assessments. The manager is very experienced and his approach has worked well over a number of years. Jupiter European Special Situations is an actively managed stock-picking fund with a bias towards high quality companies. The manager pays little attention to the index in positioning the fund but is responsive to market dynamics. North American Equities In the North American portion of the Portfolio, we have suggested a combination of Threadneedle American and Schroder UK Mid Cap. The Threadneedle American fund is managed as a benchmark-aware offering that has been successful in delivering consistent relative returns over time, characteristics that unfortunately are not easily found in the IMA North American sector. The Schroder US Mid Cap fund is invested primarily and mid and smaller companies in the US market and as such can be seen as a higher risk offering. However, our view is that the manager s experience and innate risk-awareness makes this fund appropriate for use in a blend and an attractive long-term holding for US equities. Japanese Equities Schroder Tokyo has been selected for the Portfolio s Japanese equity exposure. The Schroder team has a long heritage of investing in the Japanese stock market and is very well resourced. The manager has been involved in Japanese equities since the early 1980s, and he has a pragmatic approach which has produced consistent returns over the long term.
Model Portfolio 6 Overview 12 Asia Pacific ex Japan Equities In the Asia Pacific ex Japan portion of the Portfolio, we have suggested the Fidelity South East Asia, Newton Asian Income and Schroder Asian Alpha Plus funds. Fidelity South East Asia is managed with a flexible and active approach and the manager is prepared to back his views with conviction. This can result in greater volatility but this has been rewarded with strong relative returns over the longer-term. Newton Asian Income aims to provide an above average income with capital appreciation. Managed with a yield discipline, the preference is for investments in sustainable businesses, which can fund the dividend distributions. Jason Pidcock has managed the fund since inception. He is an experienced stock-picker and marries his bottom-up analysis with Newton s thematic approach, which aims to identify global themes. The Schroder Asian Alpha Plus fund is managed with an awareness of the index rather than any strict formal constraints. The manager Matthew Dobbs is a long term investor, who focuses on fundamental research but is mindful of valuation too. We believe Mr Dobbs' focus on valuation provides him with a robust framework and reference point that helps inform his investment decisions and balance portfolio risk. Emerging Market Equities For emerging markets, we have suggested the First State Global Emerging Market Leaders and the Aberdeen Emerging Markets funds. The First State fund is managed in line with the Group s Asian and Emerging Markets investment ethos and process, which seeks to invest in well-managed companies with sustainable business models, predictable growth and low valuations. Aberdeen s team-based approach is bottom-up and the mindset is on absolute returns, not the benchmark. They tend to be long-term investors and with their relatively conservative investment approach.
Model Portfolio 7 - Overview 13 Key Facts Asset Allocation (Q4 2012) The Model Portfolios were established in December 2009. Asset allocation is provided by Distribution Technology Ltd. Morningstar OBSR populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitatively-driven research process. The objective is to deliver outperformance in each of the asset classes of the Portfolio over the long term. Asia Pacific ex Japan 12.0 Japan 5.0 Emerging Markets 13.0 UK Corporate 7.0 UK 44.0 North America 12.0 Europe ex UK 7.0 Model Portfolio Q4 2012 Asset Classes % Asset Allocation Fund Suggested Fund Weight MStar OBSR Rating Fixed Interest 7 UK Corporate 7 Fidelity Moneybuilder Income 3.5 Gold M&G Optimal Income 3.5 Silver Equities 93 UK 44 AXA Framlington UK Select Opportunities 7 Gold BlackRock UK 8 Bronze BlackRock UK Special Situations 8 Gold Investec UK Special Situations 7 Gold Schroder UK Alpha Plus 7 Gold Threadneedle UK Equity Income 7 Silver Europe Ex UK 7 Cazenove European 3.5 Silver Jupiter European Special Situations 3.5 Silver North America 12 Schroder US Mid Cap 5 Gold Threadneedle American 7 Bronze Japan 5 Schroder Tokyo 5 Gold Asia Pacific Ex Japan 12 Fidelity South East Asia 5 Silver Newton Asian Income 4 Silver Schroder Asian Alpha Plus 3 Silver Emerging Markets 13 Aberdeen Emerging Markets 6.5 Gold First State Global Emerging Markets Leaders 6.5 Gold 100 100
Model Portfolio 7 Overview 14 Fixed Income For the UK Corporate Bond exposure, we have suggested two funds, namely Fidelity Moneybuilder Income and M&G Optimal Income. The Fidelity fund is located in the Corporate Bond sector and the M&G fund is located in the Strategic Bond sector. Fidelity Moneybuilder Income is the most conservative fund in terms of its mandate. The manager is extremely experienced and seeks to deliver consistent, above average returns in a risk controlled manner, which he believes will lead to competitive returns over the longer-term. The M&G Optimal Income fund is strategic in nature and the manager has the ability to make significant moves between Gilts, investment grade bonds, high yield bonds and other instruments depending on where value is identified. Strategies may also be implemented through equities and derivatives. Equities UK Equities In the UK portion of the Portfolio, we have suggested six funds, Threadneedle UK Equity Income, BlackRock UK, AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations. Threadneedle UK Equity Income fund is located in the UK Equity Income sector while the other five funds are located in the UK All Companies sector. Within the UK blend we are seeking to ensure an allocation to a stable core, expressed through BlackRock UK; the allocation to Threadneedle UK Equity Income reflects our belief that the income component will be a significant portion of total return through the medium term; and finally the balance of the UK blend is allocated to a higher alpha managers in the form of AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations. We have selected Threadneedle UK Equity Income as we have high regard for the manager and believe that he has the ability to perform well over the long term. In practice, the fund is run for total return, but with greater emphasis on producing a strong and rising yield. This results in a pragmatic management style and is supported by the quality of Mr Harrison s top-down market insights and the team s detailed stock research. This believe that this is an interesting fund for the UK blend as we think that income strategies are likely to be rewarded where the dividend is a significant element of an equity investor s total return moving forward. The manager of the BlackRock UK fund also aims to provide core exposure to the UK market, seeking to generate outperformance through stock selection and to some extent by tilting the overall portfolio exposures to benefit from prevailing market conditions. These funds are complemented by allocations to mix of different types of funds in the form of AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Schroder UK Alpha Plus and Investec UK Special Situations, all of which tend to have higher risk characteristics compared to the index. AXA Framlington UK Select Opportunities is managed by the very experienced Nigel Thomas and as its name suggests, it is more opportunistic in nature and provides exposure to companies from across the market cap spectrum. His thoughtful and considered approach has generated attractive relative returns for his investors over many years. BlackRock UK Special Situations fund is strongly biased towards mid and small cap companies and is based upon meticulous stock selection. He is skilled both in identifying smaller companies with potential whilst acknowledging the inherent risk in this strategy within his portfolio construction, tilting its aggregate positioning as he deems appropriate for the market conditions. Schroder UK Alpha Plus is a large-cap biased fund that is very actively managed, with the fund manager having an absolute return approach to investing in the sense of wishing to generate positive returns over the long-term by investing in stocks that he believes will rise in value by at least 10-20% in the ensuing three years. This approach has been rewarding although the fund is volatile in nature, hence the importance of featuring it within a blend. Finally, Investec UK Special Situations offers investors a reasonably diversified portfolio of UK equities, managed using the traditional principles of value investing. The fund has been managed by Alastair Mundy who is one of very few genuinely contrarian investors and the courage of his convictions has been tested at various times in the past. Investors do need to be prepared for a performance and risk outcomes that can differ from that of the market but the fund can work well within a blend as it typically provides style diversification. European Equities In the European equity portion of the Portfolio, we have selected Cazenove European and Jupiter European Special Situations. The Cazenove fund is large cap biased and is managed in a benchmark-aware fashion while the Jupiter fund carries more risk from a relative point of view. As mentioned above, Cazenove European is managed in a benchmark-aware manner and the fund is positioned according to the manager s business cycle assessments. The manager is very experienced and his approach has worked well over a number of years. Jupiter European Special Situations is an actively managed stock-picking fund with a bias towards high quality companies. The manager pays little attention to the index in positioning the fund but is responsive to market dynamics. North American Equities In the North American portion of the Portfolio, we have suggested a combination of Threadneedle American and Schroder UK Mid Cap. The Threadneedle American fund is managed as a benchmark-aware offering that has been successful in delivering consistent relative returns over time, characteristics that unfortunately are not easily found in the IMA North American sector. The Schroder US Mid Cap fund is invested primarily and mid and smaller companies in the US market and as such can be seen as a higher risk offering. However, our view is that the manager s experience and innate risk-awareness makes this fund appropriate for use in a blend and an attractive long-term holding for US equities. Japanese Equities Schroder Tokyo has been selected for the Portfolio s Japanese equity exposure. The Schroder team has a long heritage of investing in the Japanese stock market and is very well resourced. The manager has been involved in Japanese equities since the early 1980s, and he has a pragmatic approach which has produced consistent returns over the long term. Asia Pacific ex Japan Equities In the Asia Pacific ex Japan portion of the Portfolio, we have suggested the Fidelity South East Asia, Newton Asian Income and Schroder Asian Alpha Plus funds. Fidelity South East Asia is managed with a flexible and active approach and the manager is prepared to back his views with conviction. This can result in greater volatility but this has been rewarded with strong relative returns over the longer-term. Newton Asian Income aims to provide an above average income with capital appreciation. Managed with a yield discipline, the preference is for investments in sustainable businesses, which can fund the dividend distributions. Jason Pidcock has managed the fund since inception. He is an experienced stock-picker and marries his bottom-up analysis with Newton s thematic approach, which aims to identify global themes. The Schroder Asian Alpha Plus fund is managed with an awareness of the index rather than any strict formal constraints. The manager Matthew Dobbs is a long term investor, who focuses on fundamental research but is mindful of valuation too. We believe Mr Dobbs' focus on valuation provides him with a robust framework and reference point that helps inform his investment decisions and balance portfolio risk. Emerging Market Equities For emerging markets, we have suggested the First State Global Emerging Market Leaders and the Aberdeen Emerging Markets funds. The First State fund is managed in line with the Group s Asian and Emerging Markets investment ethos and process, which seeks to invest in well-managed companies with sustainable business models, predictable growth and low valuations. Aberdeen s team-based approach is bottom-up and the mindset is on absolute returns, not the benchmark. They tend to be long-term investors and with their relatively conservative investment approach.
Model Portfolios Fund Descriptions 15 The section below provides further information about the funds that have been selected for the Model Portfolios. Fixed Interest UK Corporate Cash JPM Sterling Liquidity The fund seeks to achieve a competitive level of total return in Sterling consistent with the preservation of capital and a high degree of liquidity. The fund is typically suitable for temporary or medium-term cash investments and aims to offer a high level of security. The fund s investment strategy focuses on the debt obligations of governments, international organisations and corporations or financial institutions of high credit standing. M&G High Interest (ISA Only) For ISA investors, the M&G High Interest* fund is highlighted, given that cash and money market funds are not allowable investments. This fund is not a cash proxy because it features securities such as floating rate notes and short-dated corporate bonds. The fund is also located in the IMA Corporate Bond sector. Nevertheless, the fund is managed with the aim of maintaining stability of capital and providing a steady flow of income and can be regarded as relatively low risk in nature compared to other fixed income funds. While the fund carries a greater level of risk compared to a cash deposit, it also provides scope for a higher income stream. Dividends are paid on a quarterly basis. *The fund name is changing in November 2012 to the M&G Short Dated Corporate Bond fund. UK Property M&G Property Portfolio The M&G Property Portfolio aims to maximise long term total return through an actively managed UK commercial property portfolio. The fund is managed by Fiona Rowley, who has worked in the property team at Prudential Property Investment Managers (PruPIM) since 1994. Ms. Rowley was recently joined by co-manager Justin Upton, who has 9 years of property fund management experience. The fund will be diversified both by property and industry. PruPIM believes that property is a real asset which can be actively managed to enhance performance. The investment process combines market forecasts and research views on rental growth, depreciation rates and risk premium levels with detailed market knowledge. Threadneedle UK Property Trust The Threadneedle UK Property Trust aims to provide a total return comprising income and capital growth, by investing in a diversified portfolio of predominantly UK commercial property. The lead fund manager is Don Jordison, who has run the mandate since launch in February 2007, and is supported by deputy fund manager Chris Morrogh. The fund focuses on higher yielding assets which are often just outside the prime real estate category. Risk is mitigated by diversification, and by investing predominantly in existing buildings, keeping property development risk to a minimum. The fund managers leverage the resources of Threadneedle s well-resourced property team, including property management and investment professionals. The managers launched the fund in February 2007 and maintained a low exposure to the property market until 2009, when they began to purchase assets through the bottom of the market. The aim is for the fund to be 90% invested in direct properties. We consider this fund to be a high quality proposition in this specialist area. Fidelity Moneybuilder Income The Fidelity Moneybuilder Income fund offers investors a well-diversified portfolio of primarily investment grade bonds, the management of which is underpinned by thorough credit and quantitative research. It has been managed by Ian Spreadbury since launch in September 1995 and he seeks to generate incremental returns with low volatility through a methodical and prudent portfolio construction process that incorporates a range of noncorrelated strategies. The fund is very well diversified and duration is controlled tightly as it is viewed to be a less predictable source of alpha. There is also a limit of 5% on the fund s exposure to high yield. Ian Spreadbury s long tenure at the helm of this fund is testament to the prudence of his process, which manifests itself in a consistent return profile with relatively low volatility compared to many of its peers. His considered approach is supported by the rigour of his macroeconomic analysis, which seeks to consider all potential scenarios and their likely impact on the fund, and the assistance of a team of dedicated credit analysts. Invesco Perpetual Corporate Bond The Invesco Perpetual Corporate Bond fund offers a corporate bond fund that is managed in an open-minded and flexible manner, with a strong emphasis on the appraisal of macro-economic forces and valuations. It has been managed by Paul Causer and Paul Read, Co-Heads of fixed income at the company s Henley offices, since 1995. They seek to deliver attractive total returns over the long term through a pro-active and unconstrained investment approach and believe that fixed interest markets are efficient but continually present opportunities. Their approach is based upon macroeconomic analysis, credit analysis and value assessment. In keeping with the fund s flexible mandate, it may be invested up to 20% in Gilts and/or high yield bonds and opportunities in overseas bonds may also be pursued although foreign currencies are mostly hedged back to Sterling. The managers are extremely experienced fixed income practitioners and they have built up an enviable reputation for successful fixed income investing across a number of economic and market cycles. We like the pragmatism in their approach and the fact that they are prepared to flex their stance to suit the market conditions and their view, from cautious to aggressive as appropriate and within the bounds of this mandate. This pro-active approach has proved to be very successful over the long-term. Kames Investment Grade Bond The fund offers a corporate bond fund that is managed with a view to adding value from duration, yield curve, asset allocation, sector allocation and individual stock selection. It is co-managed by Stephen Snowden, who rejoined Kames Capital in 2011 from Old Mutual, and Euan McNeil. The fund was launched in 2006 and set up with UCITS III status and a flexible mandate in order for the managers to take advantage of global opportunities, although from a currency perspective it is always at least 80% hedged back to Sterling. The fund may also be invested in high yield, up to a maximum of 20%, and derivatives are permitted for investment purposes. This fund was established with a flexible mandate through which the managers seek to capitalise upon the team s broader capabilities across different markets. The team is well-resourced and includes specialists covering a broad range of fixed income asset types. They work in a strongly collegiate fashion and they demonstrate real dedication to detailed analysis which helps them to unearth opportunities.