Rayner Spencer Mills Research (RSMR) is an independent research company specialising in rating, comparing and analysing the full range of funds and products available in the UK. The following extracts are taken from the firm's review of the F&C MM Lifestyle Funds range, the full version of which may be read here
The F&C MM Lifestyle funds are run to match the Distribution Technology (DT) risk profiled asset allocations. The original four funds were introduced in March 2007 and were unique at the time in offering a retail solution that adopted a third party asset allocation solution, based on a series of investor risk profiles.
The funds were at the forefront of moving investors to consider funds that focused on risk as a key factor rather than relative performance-led selections. The new Foundation fund was launched on 2 December 2013 and is the lowest-risk of the five funds in the range.
RSMR on multi-asset investing
The last 10-year period has been among the most difficult for investors. Although figures will show global equities have outperformed government bond markets over this period, it has certainly not been straightforward or predictable, with 2008 and 2011 prime examples of this.
This background has made it very difficult for most investors – professional or otherwise – and requires a significant amount of patience and skill to seek out those areas that can offer some return in an ever-rotating economic environment.
Managed investment solutions are one way of helping to take away some of the stress of selecting assets in this environment, allowing the adviser to focus on the many other areas of financial planning while the assets are managed on their behalf. It may be argued that these funds can be seen as simple solutions to most investment selection and monitoring issues and they are clearly a popular choice.
The challenge is that, while it always seems advantageous to have more choice, selecting the right option from an ever-growing list is increasingly difficult and, taking account of the increasing number of complex investment instruments that can be used to form portfolios, the apparently simple solutions can become all the more complex.
The changing regulatory environment is also adding to the difficulty in building an appropriate process that takes a client from risk assessment through to investment solution. The expanding range of choices to take an investor through this process requires advisers to have access to further guidance to bring all the elements together to provide rigour and consistency.
To try and simplify the choices while providing enough options to cover most investors’ requirements is a difficult task and we believe the F&C MM Lifestyle fund solutions can go a long way to helping overcome many of these issues and difficulties.
In recent guidance papers on ‘assessing suitability’, the regulator emphasised the need for advisers to have sufficient understanding of the features and risks of the investment they select for clients. We believe a thorough understanding of all aspects of an investment solution will ensure the adviser is best placed to achieve the most appropriate outcomes for their clients and our review is intended to support that objective.
Distribution Technology (DT) uses stochastic modelling to come up with a range of risk-based asset allocations. These are derived using Modern Portfolio Theory principles, as outlined by Harry Markowitz in the 1950s and these principles are now widely used by investment advisers.
DT uses thousands of historical data inputs to provide a guide to a range of potential outcomes and as well as performance from the key asset classes, it also uses a number of other inputs including inflation, expense ratios and the probability of bond defaults.
All the F&C MM Lifestyle funds are designed to be on the efficient frontier of risk and return. However they will only remain on the efficient frontier if the funds the investor uses are rebalanced to the asset allocation specified by DT.
The funds do this for the five most popular risk profiles – that is, 3 to 7. Rebalancing is undertaken at appropriate points and, because of positive cashflow, the funds can rebalance cost-effectively. The key advantage of this approach is that the two elements of the process – the risk-profiling and the fund management – are effectively working together to the same risk and asset allocation parameters. This ensures the funds will not stray outside the acceptable parameters and will therefore always be aligned to the client’s risk profile, within certain tolerances.
While DT reviews its asset allocations quarterly, in practice the F&C MM Lifestyle funds will be rebalanced constantly to account for any DT asset allocations changes and the team’s ‘tactical tilting’ to asset allocation. The asset allocation within which F&C must operate is quite broad, detailing the high-level split of assets only. This means F&C has sufficient scope to add value – however the team must ensure they remain within the volatility parameters set for each fund.
The alignment of the funds to the DT asset allocation has some additional flexibility in that the manager has a +/- 5% tolerance to the strategic allocation weights. Provided the portfolio remains within the relevant risk tolerances then this appears a pragmatic extension of the managers’ powers to run the fund. In reality this flexibility is only fully used if the managers have a high conviction in a position.
Overall, the concept of the F&C MM Lifestyle funds allows the manager to focus on fund selection more than strategic allocation giving a framework for the delivery of consistent risk and return patterns.
The fund management team
The funds are run by Gary Potter and Robert Burdett who are very experienced multi-asset managers. The structure within which they operate also allows access to the wider investment team within F&C if required.
The core of the team have worked together for more than 17 years and have established a strong reputation in fund selection. They undertake a detailed analysis of each fund using a long-established but regularly challenged, scoring process known as the ‘IQ factor’, their proprietary research tool that is the basis for all selection choices. The team are keen to provide a differentiated offering, which means they look to use not just what are perceived as the well-established norms but to explore the widest range of fund options including boutique fund opportunities.
We believe this provides investors with the opportunity to invest in new or less well-known funds and ideas before other similar portfolios are prepared to do so. This does not mean higher-risk but a wider and potentially more rewarding opportunity set.
Rayner Spencer Mills Research comments
The F&C MM Lifestyle funds are representative of an approach to investment selection that combines the strengths of academic research, stochastic modelling and fund selection using a structured research methodology.
The Retail Distribution Review emphasises the need for advisers to seek additional resource in investment analysis and fund selection. Linking risk assessment to an investment solution through logical steps can form the basis of a robust process and the F&C MM Lifestyle funds help deliver an audit trail that has significant value to the advisory marketplace.
The team balance is very important in any process and the management team have a wealth of experience and consistency and are focused on delivering the best risk-adjusted return for the funds, ensuring all decisions are fully challenged prior to implementation.
The team combine quantitative and qualitative research with a macro tilt to find funds that are not only strong and well run but also relevant to the current market and economic conditions. The key to providing this consistency is the careful combination of funds with differing investment styles, which is an integral part of this process.
There is a disciplined monitoring regime, where a ‘squad’ approach is taken – conducting as much research on the reserve list as on the funds they actually hold. Combined with the identification of change drivers through the IQ scoring and a programme of ongoing manager meetings, this ensures the management team are constantly reviewing the portfolios and are able to respond to changes in a timely and effective way.
The F&C MM Lifestyle funds have the ability to deliver consistent returns through the combination of a stable asset allocation process and a thorough and robust fund selection methodology.