Following on from the earlier Q&A, we talk to Francis Chua, Fund Manager, and Aimee Bowkett, Assistant Fund Manager of LGIM’s MPS team, this time looking at the detail of how and what they do when it comes to structuring and managing LGIM’s range of MPS portfolios.
We discuss the breakdown of the 25 different portfolios in the range and find out why they believe that focusing on investors’ needs is the key to a robust MPS due diligence process.
When seeking an MPS solution for their clients, advisers and paraplanners are spoilt for choice. So, with all these options available, how do you select one which best suits your clients’ needs? LGIM has built an impressive range of MPS portfolios designed to meet individual client needs. However, they are designed in a way which, importantly, not only aims to minimise the costs involved but also maintains the investment flexibility and dynamism which is so crucial for optimising returns.
The real basis of the LGIM MPS range lies within its core values. These are built around LGIM’s five key pillars of multi-asset investing and, according to LGIM’s Francis Chua and Aimee Bowkett, “these pillars sum up the core values of the LGIM MPS range and are the foundations that help us in our aim to deliver our clients’ objectives.”
The five key pillars are:
Each portfolio is designed with a specific risk profile in mind – and it is intended to stay in those risk profiles over time. This allows advisers to choose the most suitable portfolio for their individual client’s needs.
2.) Dynamic asset allocation
LGIM’s MPS team reviews all the portfolios regularly and makes adjustments according to its views on the market, in order to manage the portfolios within their risk profiles.
The MPS team invests in a broad range of asset classes, including alternative assets (e.g., REITs, infrastructure, emerging market debt). By constructing diversified portfolios, LGIM aims to deliver strong risk-adjusted returns, which it believes is a key differentiator for its MPS range.
LGIM also aims to reduce the concentration risk that comes with investing in global equities – particularly global equity index funds. As Bowkett explains, “Over the last few years, we have seen a large concentration build-up from a handful of US stocks that are driving performance. However, we look to diversify by investing regionally so we spread any potential risk more widely to avoid any country or stock-specific risk.”
The model portfolios use LGIM’s low-cost index building blocks which helps keep the overall charges low. In addition, LGIM’s investment team is extremely selective in its use of active managers where it believes the potential advantages are worth any additional cost.
LGIM take its responsibility as shareholders on its clients’ behalf very seriously indeed. Wherever possible, it seeks to influence companies’ actions by voting on motions put forward by boards. Its dedicated Investment Stewardship team not only votes on behalf of investors, but also ensures their voices are heard loud and clear on ESG issues.
As Chua explains “We have intentionally designed a wide range of model portfolio options to cater to the varying needs of investors. In total, we have 25 portfolios – split into 21 growth-oriented portfolios and 4 income-oriented portfolios.”
He goes on to highlight that when it comes to the growth options, the 21 growth-oriented portfolios are broken down into 3 categories which he describes as follows:
- Index model portfolios: These portfolios predominantly use LGIM’s index building blocks.
- Blended model portfolios: These portfolios have a higher allocation to third party active building blocks – however, as previously explained, this active exposure is only in areas in which LGIM feels active management is rewarded.
- ESG portfolios: These portfolios primarily consist of ESG-focused building blocks and also invest in some third party active building blocks.
It’s clear that risk really matters too. According to Chua “each style of growth portfolio has 7 risk profiles, which allows us to provide suitable solutions for each individual client’s needs.”
The income-focused portfolios are designed to grow capital as well as deliver income – so, it’s not a solely income-focused approach. Chua says: “we believe it’s important to keep the capital objective within these portfolios, as the clients who invest in them will require a capital return too as a means of preserving their real value over time – as well as feel confident that the income they receive is sustainable over the long-term.”
He explains that for these portfolios: “we offer 7 risk profiles that were designed in-house. However, we can of course map these profiles to any external risk profiles that advisers use.”
Achieving effective diversification
When it comes to making sure that the portfolios are appropriately diversified, Bowkett believes that they are robust.
As she explains: “We believe that effective diversification is very achievable – as mentioned previously, diversification is one of the main focuses of our model portfolios. When we build a model portfolio, we start by constructing a long-term asset allocation that has optimal diversification for a given level of risk. This focus on diversification is sustained throughout every stage of the portfolio construction process. Furthermore, after we set the long-term asset allocation, we then apply our medium-term economic views (i.e. what we see playing out over the next 1-5 years) and alter the asset allocation in line with this. For this stage in the process, we receive support from the wider LGIM Asset Allocation team, the economists and strategists, who share their expert economic views and leading insights into asset classes. This helps us in the way we dynamically adjust portfolios and apply risk management. Ultimately, through dynamic asset allocation, we aim to ensure that portfolios remain well diversified and, more importantly, provide suitability to clients on an ongoing basis and through all market environments.”
Bowkett goes on to stress that: “in addition, within the fund management team we assess the building blocks of our strategic asset allocation – and we are also constantly look for new building blocks that we can implement to improve diversification. This includes index, or even active, building blocks – and if we use the alternative space as an example, these building blocks could be a global technology fund, or a renewable energy fund, etc.”
Have we moved on from 60/40?
Given today’s challenging market conditions, do Chua and Bowkett believe that the old 60/40 asset allocation split is now a relic of the past?
Chua brings it right back to basics. “Firstly,” he says, “I think we have to ask ourselves: what is the objective of a 60/40 portfolio? The answer is to deliver diversification. Investors allocate 60% to equities and invest the remaining 40% in bonds to diversify their portfolios.
Our team is a strong proponent of diversification. However, we believe that the management of diversification cannot be static – which is again reflected in the way we dynamically manage our asset allocation. It is also important to understand that diversification changes according to market conditions. Therefore, one must be active in pursuing diversification and in recognizing the changing economic landscape.”
Of course, the world of investments today is drastically different than it has been in the past.
He explains: “Previously, buying fixed income could indeed provide sufficient portfolio diversification, however, the space has since evolved and become far wider. Therefore, to aim to achieve diversification in today’s investment landscape, our model portfolios also include assets such as alternatives and different varieties of fixed income (e.g., credit, high yield and emerging market debt).”
Ultimately, he agrees that, although the 60/40 asset allocation split is an old construct, and perhaps too simple for today’s markets, “the principle behind diversification remains the same and is just as relevant in today’s market conditions.”
Best of both?
We were interested to hear Chua and Bowkett’s views on whether an MPS could combine the advantages of an “off the peg” solution but still be tailored to look like a bespoke product to match client needs?
As Bowkett reminds us: “a key feature of model portfolios is that they can provide a lot of flexibility to investors. The investor – along with their adviser – is also able to determine the degree of flexibility. They can opt for an “off the peg” solution or a fully bespoke solution, based on their preferences. Furthermore, a major advantage of model portfolios is the high level of service and transparency on offer – and this can make off-the-peg solutions feel more bespoke. This is particularly true of LGIM’s MPS, as we offer 25 different portfolios, which helps advisers find a suitable solution for their clients without compromising on their goals or objectives.”
She goes on to highlight that, in addition: “Investors are able to invest in our portfolios via a platform of their choice, which gives them an exact breakdown of the portfolios at any given time, and access to a range of portfolio analytics (depending on the platform). There is also full transparency in terms of asset allocation changes, and clients receive regular communications to ensure they are kept up to date. Finally, we publish our rebalancing dates ahead of time, which allows investors the opportunity to work with an adviser and plan their transactions efficiently around these dates. Investors can even opt out of the rebalance if that is beneficial to them. These features, perhaps, make our portfolios feel more bespoke and tailored to the individual investor.”
Bowkett makes one final point that she feels is particularly relevant to advisers, which is that LGIM offers a range of marketing support to help with client conversations. She comments: “We have a collection of useful brochures and an interactive digital hub where advisers can explore the detail of the portfolios. We’re here to help advisers and paraplanners on so many bases to make sure that the solution they recommend to their clients is the most suitable one for their individual needs.”
Important Information: For professional clients only. Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. It should be noted that diversification is no guarantee against a loss in a declining market. Views expressed are of LGIM as at 13/09/22. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894.Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272