Centralised Investment Proposition

Centralised Investment Proposition

The finance solution our clients trust 01

Introduction Our centralised investment proposition (CIP) outlines Herbert & Webster s uniform approach to investment advice. The methodology of our CIP gives our clients a consistent approach to an appropriate investment solution along with an ongoing monitoring of suitability. Our CIP is powered by Financial Express online tool FE Analytics, which give us access to their vast database of financial information. This is coupled with the Investment Planner which aid us assess our client s capacity for loss and risk appetite, considering individual needs and goals with an asset allocation output, instead of a suggested list of funds, which provides guidance over what to invest in, but is not prescriptive. The Asset Allocation is powered by EValue Optimised Asset Allocation, which is designed to adapt to all risk categories and across terms, ensuring there are no large jumps in risk between each outcome. To understand risk within the asset allocation, the investment planner is calculated by transforming each of the EVaue asset allocation into a portfolio, using passive indices to represent each asset class, from which we can measure the risk score of each band via the FE Risk Score. This allows us to review existing and new investment solutions, within the client prescribed asset allocation and the risk involved be it a single fund, model portfolio or bespoke discretionary portfolio. The CIP has been designed to create an automatic audit trail to demonstrate due diligence and appropriate investment solution inclusive of the complete paper trail of all research and monitoring. 02

The building blocks of Herbert & Webster CIP 03

Financial Express Financial Express is trusted by hundreds of thousands of investors, advisers, asset managers and platforms who use FE data, software and investment advice every day, FE is the UK s leading investment ratings and research agency. From their industry knowledge and data driven process, they have produced many tools which we use to deliver our CIP. Asset Managers Private Investors Advisers Media Connecting the industry Paraplanners DFMs Platforms Fund Supermarkets 04

FE Analytics

FE Analytics FE Analytics is our key tool to assessing an appropriate investment solution from research, analysis, portfolio construction, due diligence and ongoing monitoring. FE Analytics give us timely, robust, independent data coupled with a wide range of avanced modelling, analytical, reporting and presentation tools for our adviser. FE Analytics, has consistently proved to be the leader in its field. The breadth and quality of their investment data sets them apart - extensive range of 300,000 instruments including onshore, offshore and international funds, UT & OEICS, life, ITs, pensions, ETFs, investment trusts, equities and DFMs. 06

Some great benefits of using FE Analytics We can quickly and easily model prospect s current investment situation and optimise the proposed investment solution. Create instant fund and portfolio comparison reports to demonstrate the value of the proposition side-by-side against their existing investments. Investment Forecaster to compare the projected returns of their current portfolio against our suggested asset allocation. Compare any instrument against any other so you can understand the effect of proposed changes to a portfolio or whether a fund is really outperforming his benchmark or peers. Huge range of sophisticated charting and analysis tools to analyse performance, ratios, holding information and risk. Understand the fund selections with FE trusted ratings including FE Crown Fund Rating and FE Alpha Manager Rating. The FE Risk Score FE understand that taking risk is necessary. Calculated risks are a part of everyday life, which is why we have FE Risk Scores. Investors need to be sure that they are making a truly informed decision based on the facts, and FE Risk Scores provide a single, easy to understand measurement of the relative riskiness of individual investments or even an entire portfolio. FE Risk Scores are designed to be a simple and intuitive tool enabling investors and advisers to measure the risk of an entire portfolio or its constituent elements. Indeed, a portfolio s overall risk can be compared to holdings within it to assess whether benefits have been gleaned from diversification. FE Risk Scores define risk as a measure of volatility relative to an index of the 100 largest UK companies (the benchmark), which has a risk rating of 100, and rebased to Sterling. Instruments more volatile than the benchmark have a score above 100 and vice versa giving a reliable indication of relative risk. Most volatility measures are based on absolute risk. Because the absolute levels of risk in markets naturally ebb and flow, risk levels can appear to change without there being significant changes to the fundamentals. So these changes could spuriously encourage people to sell or acquire particular investments. Relative risk is not affected in the same way, and is likely to provide a clearer indicator of important risk changes. Scores are recalculated weekly on a rolling three-year total returns basis. Most funds would fall between one and 150 with direct equities scoring above 100 and pure cash = zero. Funds need an 18 month track record to be eligible for a Risk Score. FE has introduced a decay factor, or lambda*, so that older values carry less weight and this means that the scores are more responsive to recent events, without being excessively sensitive. FE s risk score calculation has been added to fund, sector and FE AFI factsheets as well as portfolio scans, custom table reports and filters. *Lambda indicates the rate at which something decays, in proportion to its value. FE has used a lambda of 0.98 so less recent data has a lower weighting at a decay rate of 5% per week. 07

Why we use FE Risk Scores? FE Risk Scores, in contrast to many other risk measurements, offer the following attractions, they are: Simple. Intuitive. Cover nearly all investment types in one measurement system. Are sensitive to market conditions, and Are a measure of relative rather than absolute risk, which means that one s perception of an instrument s riskiness is not clouded by the general ebb and flow of volatility in markets. 08

Investment Planner FE s Investment Planner is powered by EValue asset allocation, this solution helps us assess our client s capacity for loss and risk appetite, considering individual needs and goals. Some great benefits of using The Investment Planner: The Attitude to Risk Questionnaire helps the adviser and our clients begin constructive discussions around capacity for loss and risk appetite. Asset allocation output, instead of a suggested list of funds which provides guidance over what to invest in, but is not prescriptive. Results that vary according to the term of the investment. So, whilst there are 5 levels of risk there are in fact 15 outcomes as it looks at time horizon as well. 09

EValue

EValue With over 20 years of experience in the market, EValue has established itself as the market leading financial technology provider to the UK financial services market. It has an impressive client list covering product providers, banks, fund managers, employee benefit consultants, adviser firms and corporates. Today EValue work with approximately 90% of the UK s large product providers. 11

Stochastic modelling The EValue calibration of the stochastic model has underpinned EValue since its original establishment within Towers Perrin. The asset model uses historical and current market data to make assumptions about what could happen in the markets to generate sets of different scenarios. Each scenario presents an internally consistent path through which a range of economic and market indicators might evolve. By covering different economic zones the results from these scenarios represent a wide range of potential market conditions giving a reflection of the international effects and their potential effect on investment returns. These scenarios are fed into the EValue model, which calibrates the data and produces an output of a series of model asset allocations. The EValue model forecasts broad asset class characteristics and therefore does not seek to precisely replicate an explicit index. Creating the asset allocations The asset allocations are derived using an adapted version of the standard efficient frontier methodology. The method involves determining the asset allocations which will achieve the highest expected final fund value for a given risk target over the relevant investment period. Setting risk targets Risk targets for each term are set based on benchmark asset allocations for the highest and lowest risk categories. Targets for the remaining risk levels are spread appropriately between the high and low risks. The risk targets use the variation of the final fund value. The targets are fixed in terms of benchmark asset allocations, thus ensuring that as model assumptions are updated from quarter to quarter, risk targets do not move much in relative terms. Applying charges The charge assumptions used in asset allocation calculations are consistent with general product and asset management charges on products available on the UK market. These will not exactly match the charges actually levied on any given investment, particularly when the cost of advice is added to the product charge. However, the allocations themselves are more sensitive to the relative level of charges rather than the charges themselves. 12

Keeping allocations stable For practical purpose, it is sensible for the allocations to be relatively stable over time and not to be unduly affected by small changes each quarter. Overreaction can come from assets that are very closely correlated or where certain combinations of assets have very similar characteristics and small shifts in underlying expectations can suggest large changes in allocations without large gains in expected returns. To avoid this and resulting unnecessary transaction costs, a hurdle is set for large swings and they are only accepted if they exceed the challenge; for some groups of highly correlated asset classes the ration is simply fixed. Applying market constraints The asset grouping, charges and risk targets corresponding to each investment time horizon, are in theory sufficient to create efficient portfolios. However, the results might not always be desirable and achievable. For example, particularly large allocations to property would be unacceptable under certain circumstances due to the poor liquidity and potential lack of diversification. Therefore market related constraints are applied to ensure reasonable levels of diversification and liquidity. Optimise allocations The Evalue team of investment experts use highly sophisticated mathematical techniques to work out the mix of assets which give the highest return given the constraints and targets. Results are then reviewed by the EValue investment committee for consistency and suitability. The asset allocations vary by term as the risk/reward characteristics for each asset also varies by term. This generally means that allocations for shorter terms have less volatile assets included. No Risk Gaps The methodology allows to generate asset allocations which creates a gradual move in asset allocation both between risk categories and across terms, ensuring there are no large jumps in risk between categories. 13

Indicative FE Risk Score Bands & EValue Asset Allocation The FE risk score bands help when linking a portfolio to a suitable attitude to risk output. The bands are calculated by transforming each of the EVaue asset allocations into a portfolio, using passive indices to represent each asset class, from here we can measure the risk score of each band. They are calculated on a quarterly basis in line with updates to asset allocations by EValue. The portfolios are then separated into the three term-based ranges: short, medium and long. The risk score bands are calculated by selecting the mid points between each risk level for each of the three term-based ranges. The bands may be modified quarterly to reflect correlation changes as to addition to any changes resulting from the updated asset allocations by EValue. 14

Monitoring Through the power of our CIP, we can monitor and review clients existing and recommended investments via our ongoing service. We can produce a vast range of sophisticated charting and analysis tools to analyse performance, ratios, holding information and risk. Volatility as a measure of risk Below we can use an interactive scatter chart to display the annualised volatility of a group of instruments. With the performance on the X axis and volatility on the Y axis it shows which funds provided the most returns with the least risk. The example below plots the Investment Association s Japanese sector over the last year (the chart allows you to analyse up to 20 years worth of data). 15

FE Risk Scores For further analysis on instrument C the FE Risk Scores offer an intuitive measure of volatility relative to the FTSE 100. Assigning the index, a score of 100 and cash at 0, the FE Risk Scores are sensitive to market conditions, offering a robust barometer that measures relative rather than absolute risk. The scores can also be charted to track the pattern in an instrument s volatility over time. The chart below plots the scores of instrument C for a period of three years and can be used for easy comparisons to other funds. Measuring portfolio risk The FE Risk Scores also extend to portfolios - once we have created a model or portfolio on FE Analytics, we can assess its overall risk level. Thanks to the benefits of diversification, the portfolio Risk Score is often much lower than the individual scores of its component funds. Here a portfolio with higher levels of diversification benefit: 16

Correlation Table The correlation table on FE Analytics, can help you consistently manage this diversification to ensure that funds within the portfolio are behaving as required. The green and purple slabs represent a low or positive correlation between the funds within the example portfolios. Over reliance on volatility? Although volatility is a common measure of risk, it comes with certain limitations when forecasting future performance or planning for worst case scenarios. To understand the true risk/return potential of an investment solution, it can be beneficial to adopt a more holistic approach to evaluating risk. 17

Drawdown risk This is the maximum amount a fund would have lost if you bought at its peak and sold at the worst time its maximum drawdown can indicate the potential risk to holding a fund for all but the very long-term investor. FE Analytics allows us to monitor this over an extended period by plotting the maximum drawdown of a fund or a portfolio on an intuitive bar chart. 18

Inflation Adjusted Return Chart Below is an example of a cash bashing chart, you can see how each instrument has been made relative to inflation (inflation representing line B). Investment Forecaster We recognise the challenges involved in forecasting and exploring future risk with clients. The investment forecaster tool on FE Analytics can come in handy in such cases. The investment forecaster tool can project the likely return of an investment instrument by using the Evalue stochastic modeller across different time horizons and can help us to actively monitor any potential shortfall risk. 19

Sequencing risk Sequencing risk is arguably the biggest threat to the health of an investor s pot. The risk of needing to take money out of a portfolio when markets are down thereby crystallising a loss. The withdrawal feature on the investment forecaster tool is a good place to start analysis of the possible sequence risk. Fund Events Analyse performance and fund events over multiple time periods: Any dividends the funds have paid out If and when any synthetic history has been applied to the fund (applicable for Clean Share Classes) Any significant material changes in the fund Any mergers or conversions that have taken place Below is an example where dividends have been paid out by a fund: 20

Dividend Table Top row: Shows Dividends, Net Distribution and Historic Yield. Left column: Shows the funds selected. 21

Bar Chat - Total Return Here is an example of a Total Return chart using a proposed and existing portfolio: Technical Chart Bollinger Band Allow comparison of volatility and relative price levels over a specified time period. Bollinger bands consist of three lines that are plotted to represent fluctuations within price. Options to change include: Mov. Avg. Length Bollinger Width Bar Chat - Fund within Sector 22

Candlestick Provides an easily interpreted graphical representation of price changes and fluctuations. Please note this is only available for equities. For more information please refer to the Candlestick Chart Guide. Income Comparison Chart Compare income from multiple instruments: Candlestick Formed by computing the average price of an instrument over a specific number of periods (based on closing prices). Heat Mapping A clear way to highlight different rankings, whether quartile, quintile, decile or absolute. Options to change include: Length 1 Length 2 23

Holding Comparison Table Create a table that displays a further breakdown of a fund, showing its individual holdings and percentage weighting. Price on Date Table Get a historic price for any fund, index or equity on a day of your choice. 04 24

Portfolio Comparison Compare two portfolios, side by side in a client-friendly report: Dynamic Portfolio Tool Allows you to track real and/or hypothetical changes to a portfolio: 25

Conclusion The above represents a sample of all the reporting data we have access to and hopefully helps demonstrate how we monitor and oversee our CIP as well as the resource FE and Evalue provide to Herbert & Webster and our Clients. Herbert & Webster is Directly Authorised, Independent and Chartered. We believe our understanding of the investment risk and process combined with our access to monitoring and independent reporting data puts us in an optimised position to review any type of existing investment, analyse it on a comparable level and recommend investment solutions which provide reassurance and confidence it remains suitable and adequate today and in the future. 04 26

www.herbertandwebster.co.uk Herbert & Webster Ltd. John Eccles House, Oxford Science Park, Robert Robinson Avenue, Oxford, Oxfordshire, OX4 4GP Authorised and Regulated by the Financial Conduct Authority. Firm No 528384 Registered in England and Wales No 7252045