Time for a new approach to asset allocation

Trevor Greetham, RLAM’s head of multi asset, introduces the recently
launched RL GMAPs.

Asset allocation has become an increasingly difficult challenge for investors and advisers in the years since the financial crisis. Sometimes violent price swings in stock and commodity markets coupled with the collapse in the rate of interest on bonds have made it harder than ever to figure out where to invest to generate attractive returns and avoid substantial losses.

Many have sought to navigate market volatility by investing in multi-asset funds, a trend we expect to accelerate following changes in the UK investment landscape. Flexible investment accounts look set to play a greater role in long-term savings provision after large increases to ISA allowances and tighter limits to the amount of money you can pay into a pension fund.

With the lines between pensions and investments blurred, we think a new approach to multi-asset – one that embeds long-term return objectives and attitudes to risk far deeper into the investment solution – is overdue.

Multi-asset investing allows you to offer funds for different investor risk and return preferences while maintaining a consistent and repeatable investment process across a fund range. It also opens up the potential to add value through a disciplined tactical asset allocation framework.

That is why we have launched the Royal London Global Multi Asset Portfolios, or GMAPs, a six-strong range of funds designed to reflect advisers’ approaches to risk and return with a transparent and intuitive investment strategy aiming to enhance returns.

Designed with clients at the core of the solution
There are three central elements to the design of our multi-asset portfolios, which differentiate them from the existing solutions in the market and ensure they follow benchmarks specifically aligned with advisers’ own risk buckets.

First, the six portfolios have been built around long-term investment principles. They range from a UK-focused strategic bond fund to a global equity fund with four multi-asset funds at specific points on the risk spectrum in between. Exposures are spread across UK and overseas equities, property, commodities, the broad fixed income universe, absolute return strategies and cash. Each portfolio is designed to maximise returns after inflation for investors at a given level of risk.

This has been no small task. We spent the best part of a year refining the asset mixes to ensure they align closely with the real-world situations facing advisers and their clients. We were keen to include a broad mix of investments. Stocks and bonds form the core of the allocation as with any long-term investment plan with other asset classes there to play specific roles. Commodities provide resilience to unexpected inflation shocks. Government bonds provide some protection in a credit crisis. And unlike many competitors, we include commercial property, a truly distinct asset class that helps to smooth returns with the aim of providing inflation-beating long-term returns.

The next task was to populate the portfolios and it is here that RLAM’s investment capabilities come into their own. We boast a team of award-winning fixed income fund managers, and the multi asset portfolios will fully utilise that internal skillset. RLAM’s expertise in property, cash management and low-risk absolute return products is complemented by exposure to our range of low-cost equity tracker funds.

Using in-house funds has a number of advantages. Not only does it provide us with a full look-through to underlying portfolios and individual holdings (crucial for risk management purposes), it gives us a cost advantage over competitors who lack our in-house expertise. Investing in our own funds means the target ongoing charges figure for the portfolios is just 0.6 per cent across the range. We believe this is very competitive for a range of portfolios which offer diversification across all the major asset classes, actively managed fixed income and property exposure and tactical asset allocation from a highly experienced team.

I lead a multi-asset team of six with an average of 21 years’ investment experience. Our approach is research-led. We have developed back-tested quantitative models for each of the major decisions we take in the funds. First among equals is the Investment Clock, a model linking asset class returns to the global economic cycle and something I have been working on and refining since the late 1990s.

The models are the start not the end of the investment process, however. Before deciding what to do in the funds we apply fundamental and economic analysis and draw on the investment experience of the most senior investment specialists across RLAM.

The team implements the tactical asset allocation strategy, aiming to ensure the portfolios are optimised at all times from both a return and risk perspective. Derivatives allow us to adjust exposures efficiently and quickly while keeping transaction costs low.

A new world of freedoms needs a new solution
With regulatory changes making investment advice more onerous, multi-asset has become the central outsourced solution for advisers seeking to manage a variety of clients with different needs within appropriate risk-return frameworks. The increasing use of investment accounts to meet long-term goals along with savers’ newfound access to their pension pots at age 55, can only make these solutions more important.

In today’s uncertain environment, the risks of allocating to the wrong asset class at the wrong time are increasing. We believe this range of funds has the potential to respond to these conditions, combining the best of active and passive investing and with the flexibility to adjust asset exposures relative to carefully constructed strategic benchmarks designed to meet a broad range of investment objectives.

For professional clients only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. Sub-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. For more information concerning the risks of investing, please refer to the prospectus and key investor information document (KIID). Issued by Royal London Asset Management March 2016.Information correct at that date unless otherwise stated. Royal London Asset Management Limited, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, registered in England and Wales number 2372439. RLUM Limited, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. Ref: 331-PRO-03/2016-JW.