Cost-effectiveness is a key tenant of Justin Onuekwusi’s Multi-Index range he runs for Legal & General Investment Management, and is one of the first things he asks about before investing.
For this reason the range is passives heavy and also has a strong bias to in-house funds – it has not invested in an external fund in its near-two-year lifespan. “We can go external but the hurdle is quite high for cost effectiveness,” he says.
Onuekwusi moved to LGIM in 2013 from Aviva Investors, being brought onboard to start the multi-asset fund range, which he launched in August 2013. After an initial setting up period, the range fortmally started attracting assets in January 2014. Since then, the fund range of five risk-targeted funds has accumulated £452m in assets, growth that Onuekwusi describes as “quite phenomenal”.
While many of the investments in the range are passive – between 78.5 per cent and 88.5 per cent of each fund – Onuekwusi’s approach to asset allocation is not. The manager says he regularly reviews the allocations within the funds and makes changes.
His argument is that asset allocation is far more important in delivering returns for multi-asset funds than manager selection. For example, since 2010 the best emerging markets equity manager would have struggled to beat the worst US equity manager, and he thinks advisers are understanding that more time should be spent on asset allocation and less on the specific fund manager.
Most recently he has increased Japan Pacific and Europe equity exposure, at the expense of US equities. For Multi-Index 5 Europe and Japan Pacific equities increased a percentage point each, to 7.25 per cent and 12 per cent respectively, while US equities dropped from 14.25 per cent to 13.25 per cent.
“The valuations on US equities are more expensive, there has been a fantastic run on equity market returns,” he says. While the fall in oil price has been said by some to benefit the US, Onuekwusi thinks the Japan Pacific and Europe equity markets will benefit more as the countries have fewer oil companies based there, while consumers benefit from the lower prices.
With an eye to costs Onuekwusi did not sell out of US equities to make the switch, instead using new cash flows from new investors to buy more US and Japanese equities to rebalance the portfolio, thus saving on transaction costs.
This cost focus makes the total fee on the fund 31 to 32 basis points, which Onuekwusi deems the most cost-efficient, not cheapest, in the market.
However, he will move out of passives if the asset class if very inefficient and can’t be managed via an index. One example of this is UK direct property, which Onuekwusi has increased his allocation to recently. It currently stands at just over 9 per cent for Multi-Index 5.
“Property has an attractive risk-return ratio, we went positive on it in early 2013 when the capital price started to increase,” he says. These returns have started to widen recently, with income also rising, as well as secondary and tertiary markets seeing rises. However, due to its higher risk and illiquid nature, Onuekwusi doesn’t want to get too deep into the sector. “We would not go above 10 per cent in direct property, there is a cash drag with so much cash chasing few properties,” he says. For this reason he strips any cash allocation his property managers hold out of the property bucket and places it in the cash allocation of the fund.
The asset allocation differs across the five funds, which are targeted to Distribution Technology’s risk ratings, from risk rating three to seven – where most people’s risk tolerance falls. Multi-Index 5 has the largest level of assets, at £150m.
Onuekwusi says he deliberately chose risk targeted rather than risk rated or absolute return strategies as he thinks it better meets the requirements for ongoing suitability. He argues that a risk-rated fund is aligned with the client’s suitability at outset but can veer from this risk rating over time, whereas he continues to target risk on an ongoing basis.
Cash is currently higher in the portfolios than usual, ranging from 9.7 per cent in Multi-Index 3 to 0.28% in Multi-Index 7. For Multi-Index 5 it has grown from around 0 per cent at the end of 2013 to more than 4 per cent today.“We have higher cash than normal, partly because of the recognition that bonds are more volatile than historically. Cash is a 0 per cent interest rate fixed income substitute and the ultimate diversifier,” Onuekwusi says.
However, with the a referendum on the EU before 2017 being confirmed in the recent Queen’s speech, Onuekwusi is conscious of future potential fallouts from that. While current opinion polls show around 55 per cent of British people would vote to stay in the EU, Onuekwusi does not see this as a major issue currently and is conscious that more volatility might creep into the market at the referendum date gets closer.
The likely impact of this, he thinks, will be on the sterling market, meaning that closer to the time he may look to hedge out some of the currency risk.
Hedging currency risk is something Onuekwusi already does on the European and Japanese equities allocations, already having “quite a chunky” US dollar exposure. He chooses to hedge this in-house rather than use hedged indices, as it is more flexible and gives him more control.
Performance for the fund range has outperformed the relevant sectors for each risk-rating, with the Multi-Index 5 delivering 10.98 per cent annualised returns since inception compared to an average of 8.9 per cent of the IA Mixed Investment 40-85% sector. However, Onuekwusi admits comparing the performance of the range on a like-for-like basis is no easy task. He uses a peer group comparison of around 10 to 12 funds that he knows have a similar approach and are targeting the same risk rating, but acknowledges that the funds will end up being compared to the wider sector.
However, his focus, he says, is on the return delivered for the risk taken, which he breaks out for each fund and says is ahead of the peer group.