In today’s volatile and rapidly evolving investment landscape, advisers and their clients are looking for MPS solutions that can weather uncertainty while capturing new opportunities for growth. In this exclusive Q&A, Sue Whitbread, Editor at IFA Magazine, speaks with Ryan Paterson, Portfolio Manager at Schroder Investment Solutions, about why active management and great service to advice businesses matter more than ever. And how innovation as well as the use of alternatives can enhance diversification, resilience, and long-term outcomes within MPS portfolios.
Against a backdrop of ongoing inflationary pressures, market volatility and regulatory challenges, advisers are increasingly turning to diversified, MPS solutions to help clients achieve more consistent investment returns in line with their risk profile. Schroder Investment Solutions’ MPS range of diversified multi-asset model portfolios, covering active, passive and sustainable outcomes, aims to do just that, offering flexibility, innovation and disciplined active oversight across a range of risk profiles.
Sue Whitbread (SW): Ryan, let’s start with active management. How crucial is this in helping advisers and paraplanners achieve better client outcomes through MPS solutions today?
Ryan Paterson (RP): “In my view, having an active management approach really adds value and is more important today than ever. Why? We need to remember that traditional portfolios are dominated by two main risks, equity growth risk and interest rate or duration risk. In inflationary or rate shock regimes, these two risks can lose their natural diversification capabilities. That’s exactly what we saw in 2022 when a classic 60/40 mixed portfolio posted its worst calendar year since the great financial crisis. The old stock and bond playbook assumes low and stable stock/bond correlations and secondly, low bond volatility. Both assumptions broke down and are unlikely to snap back quickly, in our opinion. In such environments, adding return streams that are not primarily driven by equity or duration can materially improve the client’s outcome and their journey.
“Slower growth and consistent inflation raise concerns for both equity and bond markets and suggest consistently higher volatility going forward. Volatility can be an active manager’s best friend, because higher dispersion equals better alpha opportunities for active managers. Performance gaps within sectors, styles, regions, across both public and private markets, create opportunities for skilled security selection and timing to improve investor outcomes.
“The other important point right now is that there is a big unintended risk with index concentration in certain indices. Take the US, for example: this market now accounts for 72% of the MSCI World Index, which is a very high index concentration risk. It means that market-cap weighted benchmarks can cluster in a handful of mega-cap stocks, or in certain factors, like the growth factor that we see within markets. However, active managers can effectively cap their positions here. We can diversify our sources of return and manage the factor balance within our portfolios much better than just allocating to a very concentrated index. These are just some of the reasons that I’d argue why having a robust, active management proposition is so important in today’s market conditions. Not only does it allow for greater diversification but also more effective risk management overall as well as the potential for performance.”
There is a big unintended risk with index concentration in certain indices
SW: You’ve mentioned the importance of diversification, particularly in turbulent markets. How do alternatives fit into the picture, and what role can they play in building more resilient client portfolios?
RP: “When it comes to alternatives, they’re capable of boosting both diversification as well as the resilience of a portfolio overall. They play a useful part in our strategic asset allocation. The use of alternatives means we can effectively tap into different sources of returns that can be uncorrelated to traditional asset classes. Of course, we don’t want those returns to be dominated by asset classes and sectors that advisers and wealth managers can access in traditional markets, such as equity beta risk or duration/interest risk that you get in bond portfolios. Strategies such as equity-market neutral or other diversifiers such as insurance-linked bonds can be used, that deliver a very different return profile from traditional asset classes. This really cuts down the overall correlation and the concentration risk in the client’s portfolio overall, as well as what we’re doing within our portfolio asset allocation. It’s important for the adviser to look at the whole picture when it comes to their client’s overall portfolio – but we can play our part in making sure that when it comes to MPS, that element is effectively and efficiently well-diversified.
“We also think alternatives can really benefit or hedge against inflation sensitivity that sometimes comes through in your equity and bond portfolios. If we take real assets and commodities, for example, I’m talking about things here like gold, listed infrastructure and some real estate, these tend to track rising prices. As a result, they can help preserve their purchasing power when inflation shocks hit. The more breadth and depth to the overall asset allocation that we can bring as active managers then the better it is for the end result for the client.
“The other key benefit from using alternatives is this crisis resilience and some kind of convexity within the portfolio. Take things like a trend-following strategy and certain macro long/short strategies that you can access via hedge funds: these often tend to perform very well in prolonged sell-offs in equity markets and in dislocations that you sometimes witness in the sharp reversals that you can see within equity markets. They can act very well to help offset the strong drawdowns that you can see from traditional asset classes.”
The use of alternatives means we can effectively tap into different sources of returns that can be uncorrelated to traditional asset classes
SW: Schroder Investment Solutions has developed a strong reputation for innovation in MPS. Can you talk us through how the team is continuing to evolve its offering to meet today’s market challenges?
RP: “At Schroder Investment Solutions, innovation is always high on our agenda. One recent development is that we’ve started the process of unitising asset classes. We initially launched the Schroder Alternative Portfolio, closely followed by the Schroder Worldwide Equity Portfolio that we launched more recently. We’re continuing to evolve the whole process because we think it has many key benefits for the clients and the advisers and how we manage these on platforms.
“This approach effectively offers clients exposure to a greater range of investment opportunities and asset classes than is possible within a traditional MPS solution. Some examples here are instruments such as ETFs, which are not available or are too expensive to buy directly on platform. Therefore, by unitising the solution, we can effectively have access to much more investment instruments and therefore hope to be able to deliver better returns and outcomes for advisers and their clients.
“I suppose another example here is with hedge fund strategies used within our alternatives fund. Many of the hedge funds will not onboard their solution onto external platforms. There are a number of reasons for this, but one is over capacity constraints. Many hedge fund strategies want to effectively cap the capacity within their solution to be able to allow them the flexibility they need to transition from within their assets quite quickly and make changes. If you go onto an external platform, you effectively open yourself up to a much wider market. And it’s therefore much more difficult to control the funds flow in and out of your solution. That’s a great reason why we unitise the hedge fund allocation within our portfolios. It can make a big difference.
“We also believe that having this unitised structure allows for much better or more efficient implementation, with investment changes being made without the need for wholesale strategy rebalancing on external platforms. We can manage it all on desk. It’s much more efficient to implement, and it also delivers some operational efficiencies as well, given that our solution is used quite widely across external platforms.
“The final point here that I’d make is it also allows us the ability to try and lower costs and pass these on to financial advisers. This is in terms of our ability to negotiate fees with third-party managers, but also to facilitate better management of CGT transactions. If everything’s wrapped within a solution, the changes that we make within that unitised fund don’t incur capital gains tax. And as we all know, with the thresholds for capital gains tax being lowered dramatically, this is going to be much more important for advisers and their clients going forward, where we can continue to make the active decision within the unitised funds without having to make those single transactions within the MPS on the platform.”
SW: The MPS market has become increasingly competitive. Why should advisers consider Schroder Investment Solutions for their clients’ portfolios, and what do you see as your key strengths in this space?
RP: “As I said earlier, we continue to innovate, we’re always looking to move forward and progress with the market. We’re focused on being able to offer the best solutions and make those available to financial advisers, with our Active Model Portfolios on most of the leading platforms in the UK. I’d say that our strength boils down to four key ingredients which are:
- a repeatable investment philosophy
- a sound risk management process
- a strong investment team
- a record of consistent outperformance
“We offer a range of risk-profiled portfolios across our active MPS range. We have a purely active range, we have a sustainable range, and we have an index portfolio range as well, mapped across the risk profiles. We recognise that clients have different needs when it comes to investing in an MPS and we do our utmost to cater for those different requirements by offering an extremely broad range of MPS solutions – all of which are underpinned by our robust investment process. Hopefully advisers will find just what they want in there to meet each client’s needs.
“Also, things that we’re doing, like unitising funds, make the whole thing more dynamic. For us to be able to make effective changes more quickly within the fund, is a great benefit to adviser and which will then be passed on to their clients as well. Another key benefit that I believe our strength in the market brings, is that we’re also able to lower the cost by, obviously, our increased buying power within the marketplace. We’re able to negotiate to make sure fees are competitive as well as trying our very best to reduce the overall costs, which can be passed on directly to the client as well. This puts less pressure on the overall portfolio when it comes to generating net returns.”
Making sure that we really deliver on the service and support for advisers and their teams is crucial
SW: Finally, building strong partnerships with advice firms is clearly central to your approach at Schroder Investment Solutions. How do you and your team support advisers on an ongoing basis to help them deliver the best outcomes for clients?
RP: “Yes, as well as delivering robust portfolios for clients, service is key. For us as team, making sure that we really deliver on the service and support for advisers and their teams is crucial. It always has been, but it’s especially the case now, in the world of volatile markets. We need to be out there supporting the financial advisers and answering their questions – something we’re proud to be doing day in and day out.
“We are also able to produce a whole raft of literature and resources explaining what’s been going on with their clients’ portfolios – keeping them informed and updated. We also have quarterly webinars where we aim to try and answer advisers’ questions as and when they come up. There’s a great deal of useful collateral that we’re able to produce and help advisers along this journey.
“Going forward, I think that having a robust level of service is going to be even more important, especially with the excellent strategic relationships that we have with some of our financial advisers. We really need to be there. There are always going to be times when markets are particularly challenging and when advisers will be having difÏcult conversations with their clients. They need to know that we’re there to help and support them through thick and thin, in driving their business forward, as well as our own. It’s by working together, building strong and lasting relationships as the adviser’s investment partner, that we can really add value for the adviser and their business – as well as delivering that robust investment proposition for their client.”
For further information and to find out how Schroder Investment Solutions range can better support your client outcomes, visit their website.
About Ryan Paterson
Ryan joined Schroders in May 2021 and co-manages the Schroder Investment Solutions range of products. He has over 20 years’ experience in the investment industry, with previous roles including Research Manager, Proprietary Trader and Investment Analyst. Ryan is a Chartered Financial Analyst (CFA) charterholder and also holds the Investment Management Certificate (IMC).
