Due diligence over risk and regulations

Tom Caddick talks to Tomas Hirst about the effects of legislation on Santander’s multi-manager business.

Q: How has the multi-manager business at Santander developed since you took on the role in January last year?

A: We have three fund ranges for the UK. One is for sale within the business, we’ve got the Premium range for higher net worth individuals, and also the core proposition of straight multi-manager funds.

We have linked up with Chile on a range of typically single asset class fund of funds, which is starting to grow. Chile is a pretty Ucits-friendly envir­onment in terms of regulation, and combined with the attraction of diversification not only of asset classes but also currency, it is a particularly interesting market.

We have also linked up with Mexico to offer a predominantly domestic focused range but with some international exposure.

Q: With the retail distribution review (RDR) now fast approaching, how much focus do you believe multi managers should be giving to risk-rated products?

A: I certainly don’t think we are in a place where current and previous models are simply thrown out.

Yet, to a certain degree, the medium-term view of some asset classes has shifted and you cannot purely rely on long-term averages and the assumption of reversion to mean.

I have felt that risk-rated is the right approach for a number of years. There has traditionally been a gap between manufacturer and distribution, which has always been there. It has come to a head at certain times, but undoubtedly there has been a grey area between the two.

Maybe there has been an issue in the past in relation to due diligence. The question that needs to be asked is whether you are creating a demand or satisfying a need. (Q&A continues below)

Q: How might that grey area be addressed by product providers and IFAs?

A: With the RDR on its way, it is making people think about their business models and the investment environment that we are operating in. It is probably making us all take note, which is no bad thing.

The core thrust of it is about giving appropriate advice. It needs to be the right type of advice for the right price in order to ensure that it is appropriate for a particular client.

For me, that is what a risk-rating approach is all about. It is about getting rid of that grey area.

Q: Given the scale of the risks in the market at the moment, is there an argument that traditional risk models are struggling to factor in recent events?

A: We should not simply rely on historical numbers but they are usually a first port of call. Is the equity risk premium going to be where it has been historically or should there be a material shift in that?

Arguably, there is reason to expect a shift, given what we can now expect from the investment environment.

Our view is to identify the core principles behind putting together a risk-rated portfolio. It will be based on historical data, especially with regard to identifying key relationships between asset classes.

I do not have a problem with that as long as the core basis of it is about spread of risk, not necessarily just trying to work out expected returns.

Correlations have been shifting, but the typical portfolio is still going to be defined by how much it has in equities.

You might find that the asset classes behave slightly differently to how they have behaved in the past, but your core principle in building these types of products is the spread of risk.

You also have to differentiate be­tween long-term strategic views, which is broadly the spread of risk, and the shorter-term flexibility that you might be able to have in the portfolio.

In everything that we do, we try to give ourselves an element of flexibility to allow us to adjust to shorter term trends, ranging between three months and a year.

That does not mean we are going to change the structure of the portfolio. In some of our portfolios at the moment, for example, we might have an absolute return fund instead of cash.

In this environment, cash is not necessarily delivering at inflation or around inflation returns, as it has done in the past.

Q: Do you think the redefinition of the IMA managed sectors has helped advisers to prepare for the new regulations, or has it simply added to the confusion?

A: One of the key issues before was that there was a very generic descriptor of a sector that would mean one thing to one person and something completely different to someone else.

You would notice within the sectors that there was a huge degree of clustering within it, while there were also some extreme outliers.

Effectively, the problem was that people were not comparing like with like. Risk-rated may not be the answer for everyone and everything, but these new sectors are clearly an improvement.

Without doubt, there are good quality and bad quality funds. As long as you are comparing like with like, broadly speaking, I think the managed sectors serve a purpose.

Having said that, it is incumbent on us to make sure that the right strategies are being bought and for the adviser to ensure that what they are investing their clients’ money into is appropriate.

Whatever the situation, you need to know what you’re buying.


Tom Caddick is the head of multi-manager at Santander Asset Management UK.