We were delighted to host our latest webinar last month, in association with Legal and General Investment Management (LGIM). IFA Magazine’s Sue Whitbread and Jenny Hunter hosted the session with LGIM fund managers Francis Chua and Aimee Bowkett, where they got their expert opinions on how MPS can be supported by Fixed Income and the role it plays in a diversified portfolio.
Fund managers Francis Chua and Aimee Bowkett are both experienced Model Portfolio Service managers having been in the profession for many years, gaining expertise from a variety of industry roles. IFA Magazine was lucky enough to have access to their valuable insights on how fixed income can be used as an efficient and effective diversifier within MPS and help deliver a robust asset allocation strategy for the long term.
The topics discussed included current economic factors at play, what opportunities and threats to be on the lookout for when investing in fixed income, as well as what the product landscape looks like for MPS. We’ve put together a brief overview of some of the main topics addressed in the webinar to give you a taste of what was discussed.
The big picture
We jump-started proceedings with a review of the economic factors affecting the investment world, namely interest rates and inflation. With inflation proving stickier than expected so far this year, this has had a knock-on effect with interest rate cuts which are now predicted to start towards the back end of 2024.
Francis and Aimee agreed that both interest rates and inflation are likely to remain a key topic for investors for the rest of this year and are going to impact market dynamics. Francis believes we may have had a bit too much enthusiasm for rate cuts at the beginning of the year and Aimee further supported this by suggesting that ‘the ‘Goldilocks view’ of both strong growth and falling inflation is probably a bit too optimistic. This overbaked optimism has already led to many economic expectations being unmet and there are fears that may continue to happen in the short term.
Francis also provided his insight into how the current economic environment impacts LGIM’s asset allocation decisions and how there are multiple considerations when thinking about the future, saying: “There’s a multitude of different factors and that’s even before considering geopolitics, the elections that are happening in different parts of the world this year, and then the topical theme and rather important future theme for all of us is the future of AI as well.”
Aimee Bowkett rounded off this theme with her thoughts on inflation and confirmed that outlooks will likely be a key driver for global bond prices, but that such economic factors can rarely be accurately predicted.
She explained why she and the team prefer not to predict, but rather to prepare and said: “We’re looking at a range of possible economic scenarios and we’re looking at the different outcomes for both growth and inflation and the different probabilities that we’ve attached to those. Our central scenario, which is the one that we’ve given the highest probability to, is where we think there’s potential for continued robust growth but higher-than-expected inflation. So, we try to position the portfolios for this, but also accepting that there are potential other outcomes that we try to take into account too.”
Opportunity or threat?
With so many investment choices now available and the 60/40 portfolio as standard in investing potentially becoming a thing of the past, Francis and Aimee gave us their insights into how they minimise potential threats and maximise every opportunity in their portfolios, including the use of fixed income investments.
It’s clear that diversification and control of this within portfolios is paramount to managing risk as a potential threat as well as taking advantage of investment opportunities. Aimee explained how LGIM construct their portfolios to do just this: “We invest in a really broad spectrum of fixed income assets. So that’s ranging from lower-risk government bonds to higher-risk fixed income, like emerging market debt. And we enhance diversification through a number of ways. Firstly, we construct our own asset allocation and part of that is deciding the regional mix. So rather than just using global indices or funds, we look to set our own regional allocation and we think this really allows us to control the diversification and typically means that the results are that we have less concentration in the United States and more in the rest of the world than a global market cap weighted approach might have.”
But diversification is not the only consideration, Francis made it clear that it’s really all about getting compensated for the risk you take and understanding the relationship between asset classes. By doing so you can see the value in investments such as fixed income, as it may not always be obvious at first glance.
Product landscape
Speaking of taking an active approach, we took a look at the different products and approaches to MPS, including how fixed-income funds fit in.
The active versus passive debate has been ongoing for many years, and I’m sure it’s likely to be so for many more. At LGIM, Aimee and the team are in favour of active management even in their fixed-income portfolios and she said: “We’ve found having levers to pull when it comes to fixed income on platforms is actually sometimes a bit limited. That’s why we find it helpful to allocate to active managers within our fixed income portfolios.”
MPS can sometimes have a reputation of being a ‘one size fits all’ solution, but is that fact or fiction? Both Francis and Aimee gave us their perspective on this, agreeing that MPS is an ever-evolving proposition that offers flexibility and choice to suit different client needs.
As we round things off, we raised that thorny issue of cost and how it compares to many other factors that underpin the suitability of an investment. Francis gave us his view on why the cost is actually one of the most important considerations, saying: “I would put it up there in terms of equivalence to other factors like suitability, and that’s because, coming back to what we touched on earlier, over the long term, the only thing that is guaranteed is the cost, really.”
Conclusions
This webinar proved to be a technical deep dive, as Francis and Aimee shared their key knowledge and experience around the interaction of fixed-income investments in an MPS solution.
As well as the detailed themes above we also had many audience questions, covering the likes of AI and whether this is a threat or an opportunity as well as whether home bias really matters and why you should include fixed income in portfolios with equities at all-time highs.
The viewers proved to be a technical bunch and they went on to ask further questions about the merits of emerging market debt within a portfolio as well as what the place is for strategic bonds and absolute return fixed income strategies.
Our audience really put Francis and Aimee through their paces, but to get answers to those questions as well as a lot more of the valuable details, you will have to tune into the webinar and find out for yourself.
There’s still time
If you weren’t able to be part of our live audience, then don’t worry, we have you covered. Click here to access to the full recording.
Or click here to learn more about Legal and General Investment Management (LGIM).
About Aimee Bowkett
Aimee Bowkett is a Fund Manager responsible for managing LGIM’s Model Portfolio Service and assisting in the management of the Multi-Manager Funds. Aimee joined LGIM in 2016, originally as an Investment Specialist within the Multi-Asset Funds team where she focused on the team’s retail proposition, moving into the portfolio management team in 2021. Previously, she worked at AXA Investment Managers as a fixed-income product specialist.
About Francis Chua
Francis Chua is a Fund Manager responsible for managing LGIM’s Model Portfolio Service, Multi-Manager Funds as well as assisting in the management of the Multi-Index funds. Francis joined LGIM in October 2016 from Aviva where he was a senior investment analyst. At Aviva, Francis was responsible for the Aviva pension schemes, assisting in the implementation of the investment strategies, which had an emphasis on financial risk management and investment manager selection, as well as asset class and manager research.
