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Interesting investing: 10 planners' propositions

New Model Adviser® cover stars explain how they build their investment propositions.

James Priday, managing director, Prydis Wealth

For its model portfolios, Prydis uses the Wealth Management Association (WMA) sector average as a guide for setting asset allocation, then adds its own strategic and tactical overlays. It has 10 risk-based portfolios targeting growth, income or a mixture of both.

Prydis uses Morningstar, OBSR and FE Analytics ratings as a guide for fund selection, then meets fund managers to understand their outlook in more detail.

‘Recently we have held more alternatives in portfolios than the WMA average because we’ve found some we think could do better than more traditional assets such as property and corporate bonds. We reduced property slightly,’ he says.

These alternatives include funds that have a long-short hedge such as City Financial Absolute Equity, and funds specialising in a certain niche such as storage: Tritax Big Box REIT, for example.

According to Citywire Discovery, City Financial Absolute Equity manager David Crawford has top decile risk-adjusted performance over three years and second decile over five years.

In its discretionary portfolios, Prydis adds more specialised investments such as investment trusts, including Henderson Smaller Companies IT.

Prydis Temperate Portfolio has outperformed the IA Mixed Investment 40%-85% shares benchmark in each of the past four years, except 2013.

As well as choosing good performing funds and sectors, Prydis says it has also managed its currency positions well, which has been a crucial factor in protecting gains in overseas equities.

  • ACTIVE FUNDS: 80%
  • PASSIVE FUNDS: 20%

James Priday, managing director, Prydis Wealth

For its model portfolios, Prydis uses the Wealth Management Association (WMA) sector average as a guide for setting asset allocation, then adds its own strategic and tactical overlays. It has 10 risk-based portfolios targeting growth, income or a mixture of both.

Prydis uses Morningstar, OBSR and FE Analytics ratings as a guide for fund selection, then meets fund managers to understand their outlook in more detail.

‘Recently we have held more alternatives in portfolios than the WMA average because we’ve found some we think could do better than more traditional assets such as property and corporate bonds. We reduced property slightly,’ he says.

These alternatives include funds that have a long-short hedge such as City Financial Absolute Equity, and funds specialising in a certain niche such as storage: Tritax Big Box REIT, for example.

According to Citywire Discovery, City Financial Absolute Equity manager David Crawford has top decile risk-adjusted performance over three years and second decile over five years.

In its discretionary portfolios, Prydis adds more specialised investments such as investment trusts, including Henderson Smaller Companies IT.

Prydis Temperate Portfolio has outperformed the IA Mixed Investment 40%-85% shares benchmark in each of the past four years, except 2013.

As well as choosing good performing funds and sectors, Prydis says it has also managed its currency positions well, which has been a crucial factor in protecting gains in overseas equities.

  • ACTIVE FUNDS: 80%
  • PASSIVE FUNDS: 20%

Chris Welsford, managing director, Ayres Punchard Investment Management

Ayres Punchard runs three model portfolios: cautious income, income, and growth, all benchmarked against the AFI cautious, balanced and aggressive indices, and bespoke in-house options for those who will benefit from them.

Ethical investment was not an instant success. ‘I started in a niche way trying to avoid things I didn’t like, and trying to educate our clients to see if they shared our views,’ says Welsford. ‘It was quite moralistic and judgemental, and not everyone shared those views.’

To make matters worse, the ethical funds were not providing the expected outperformance. It was only when he took the Investment Management Certificate, and started to weave in ESG criteria, that the proposition started to hit its targets.

Welsford believes that the right managers, applying thorough quantitative and qualitative analysis, should be able to provide better portfolios if they take ESG into account.

He points to the example of Tesco’s recent accounting scandal. ‘People said that everybody was surprised, but that’s rubbish. There were numerous analysts who knew there were problems at Tesco before this was reported, and that’s ESG.’

ESG investment does not even need an ethical angle. Welsford highlights the Lazard Emerging Markets fund, managed by James Donald, as a prime example of how ESG can help filter out investments. ‘Good quantitative and qualitative analysis is ESG, and it should work better than conventional portfolios, as long as it is done right.’

  • ACTIVE FUNDS: 98%
  • PASSIVE FUNDS: 2%

Darren Cooke, director, Red Circle Financial Planning

‘Building my in-house portfolios is like building Lego, except no-one gives me a diagram,’ jokes Cooke.

He uses Dynamic Planner as a basis for his asset allocation, then applies tactical and strategic overlays. He uses FE Analytics to select funds.

‘The base is usually passive funds, although I will use active where they add value, which is in smaller companies, value opportunities, Asia funds, and high yield bonds,’ he says.

Selection criteria include one and three-year performance; fund manager tenure; alpha; beta; volatility and other measures, such as tracking error and active share.

Cooke started the current portfolios at the end of last year.

For the year to 17 May, the Red Circle 5 portfolio produced 0.15% returns, net of platform fees, versus -0.29% for the IA Mixed Investment 40% to 85% Shares sector.

‘That came from having a lower allocation to corporate bonds,’ says Cooke. ‘I also have a slightly higher allocation to biotechnology funds such as AXA Framlington Biotech, which had a negative effect.

‘But I will keep that fund as I believe its performance issues are related to the sector, not the fund, and that sector will bounce back.’

One fund that has done well for the portfolio is Miton UK Value Opportunities. When Citywire AAA-rated managers George Godberand Georgina Hamilton resigned from it recently, Cooke decided to keep it as Miton has replaced them with Andrew Jackson who has a good background, he says.

  • ACTIVE FUNDS: 45%
  • PASSIVE FUNDS: 55%

Stuart Jefferies, director, Singular Financial Planning

Singular offers in-house model portfolios – both passive and active/passive blended – and bespoke portfolios for those with a particular need. For those with needs that cannot be met in-house or who prefer an external relationship, it has a panel of six to seven DFMs.

Though Singular’s risk level four (out of seven) active portfolio has performed well against the Wealth Management Association Stock Market Balanced Total Return index over the past three calendar years with lower volatility, Jefferies attributes this more to a solid screening process than to exceptional judgement.

‘There is no skill on my part,’ he says. ‘We pick Morningstar four- and five-star rated funds as an initial screen.

‘We filter those on cost, volatility, consistency and performance. The asset allocation and the funds have hardly changed in the last three years, though we did set aside one to two years’ worth of cash for clients who needed an income in the approach to the Brexit vote.’

To choose DFMs, Singular uses research from Synaptic as an initial filter. The shortlist is then screened with reports from Asset Risk Consultants.

The DFMs Singular uses Quilter Cheviot, Investec Wealth & Investment, Brooks Macdonald and Thesis Asset Management.

Jefferies does not believe the Brexit will make a significant long-term difference to either Singular or client investments. He has not changed asset allocation since the vote.

In-house portfolios use the BlackRock Global Property Securities Equity Tracker, which has not suspended withdrawals as many other property funds have, and has in fact risen rapidly since the vote.

Two more investments that have done particularly well in the level four portfolio are Lindsell Train UK Equity and Fundsmith Equity.

  • ACTIVE FUNDS: 75%
  • PASSIVE FUNDS: 25%

Serena van der Meulen, director, Van der Meulen Associates

The business has always used bespoke, in-house portfolios for clients.

However, since going directly authorised this year it has started a new process for portfolio construction. This involves using Dynamic Planner for risk profiling and asset allocation modelling. The firm then uses research from Bankhall to start selecting funds, and Dynamic Planner’s ACE ranking system together with research from Defaqto to filter them further.

Van der Meulen says she likes the ACE ratings as they are ‘very thorough’, and says Defaqto’s documentation is ‘brilliant’.

‘My process is not the most efficient because the systems I use do not all integrate into a single back office,’ she says.

‘But I find it necessary because it gives me every possible piece of information I need to support my advice.’

Funds in the new portfolios include Alliance Trust Sustainable Future Managed, Threadneedle Global Equity and Bond and Premier Liberation V.

  • ACTIVE FUNDS: 80%
  • PASSIVE FUNDS: 20%

Richard Liddiard, partner, The Minister Partnership

In 2014, TMP started using a panel of four bespoke discretionary fund managers (DFMs) for sums of £300,000 and above. The panel is made up of Investec Wealth & Investment, Quilter Cheviot, Brooks Macdonald and Charles Stanley.

To select DFMs the firm first looks at cost and performance. However, as many DFMs are similar in these areas, it also looks to match fund managers to clients in terms of outlook, personality and specific areas of expertise.

‘For example, Keith Edwards at Quilter Cheviot has a background in income investing, so we use him for more cautious clients requiring income,’ says Liddiard. ‘David Jones at Investec [Wealth & Investment] is a good all-rounder. Also Investec might use more alternatives, such as structured products, which can help with yield.

‘We took on Charles Stanley last autumn and it seems more like a traditional stockbroker.’

Charles Stanley replaced Parmenion on TMP’s panel. ‘We felt Parmenion wasn’t quite working and the takeover by Aberdeen Asset Management did seem to affect service levels,’ says Liddiard. ‘But it was more about wanting to bring on Charles Stanley.’

For clients with less than £300,000 to invest, TMP also uses DFM managed portfolio services from Brooks Macdonald and Quilter Cheviot, and some fund-of-fund ranges, including Prudential Dynamic.

  • ACTIVE FUNDS: 75%
  • PASSIVE FUNDS: 25%

Sara Malone, partner, Gresham Financial Planning

At the last investment meeting, the firm moved part of its portfolios out of commodities into US equities. ‘Because of the commodity market crash, we came out of that sector,’ says Malone. ‘We had previously reduced US in favour of Europe, so there was a margin to add in again.’

The typical Gresham 50 portfolio featured here lagged behind its IA Mixed Investment 20%-60% Shares benchmark slightly in 2012 and 2013 but beat it in 2014 and 2015.

Malone says three funds have contributed to the recent outperformance: Jupiter European, Woodford Equity Income andRathbone Global Opportunities.

According to Citywire Discovery, AAA-rated Alexander Darwall, who manages Jupiter European, has top decile performance for one, three, seven and 10-year risk-adjusted returns in the European equities sector.

Citywire AAA-rated Neil Woodford, who manages Woodford Equity Income, has delivered top decile performance over one and three years, and second decile performance for five-year returns in the UK equities sector.

At Rathbones, Citywire A-rated James Thomson, who heads up Rathbone Global Opportunities, has achieved top decile performance over one, five, seven and 10-year views in the global equities sector.

  • ACTIVE FUNDS: 80%
  • PASSIVE FUNDS: 20%

Neil Cowie, director, Robson Laidler Financial Planning

Robson Laidler’s investment proposition uses the concept of momentum investing. The initial inspiration came when Cowie attended a presentation by Colum Wilde, founder of investing tool Clever Adviser.

‘If a fund has started to deteriorate, there is a higher than average chance that this will continue,’ explains Cowie. ‘Conversely, if it is improving, that will continue for a period.

‘The aim is to nip the deterioration in the bud [and catch rising funds quickly]. Clever Adviser offered a streamlined process for doing this by analysing each fund against nine criteria, including alpha [active return]; volatility; recent and longer term performance; and qualitative ratings. This creates a score for each fund over rolling 36-month periods.

‘When it falls below a certain score, the system recommends you sell that and replace it with the top scoring fund in that sector.

Cowie says timing does not always work, but the process is robust and well-documented and the results seem good against any reasonable benchmark.

The Robson Laidler Financial Planning Average Risk portfolio has outperformed the IA Mixed Investment 40% to 85% Shares sector comfortably in each of the past three calendar years. The Schroder US Mid Cap fund, managed by Citywire A-rated Jenny Jones, has contributed to this performance.

The investment process results in a high turnover and the Average Risk portfolio switched six of its 13 funds over the 12 months to August. Robson Laidler includes switching charges in its ongoing fee.

One significant fund change came in May when the portfolio replaced the Aberdeen Property Share fund with the Schroder Global Real Estate Securities Income fund. ‘We held the Aberdeen fund for four years and it had produced excellent returns,’ says Cowie. ‘However, performance had started to dip and we felt a more global fund would provide better diversification, particularly in view of the impending EU referendum.’

  • ACTIVE FUNDS: 90%
  • PASSIVE FUNDS: 10%

Mike McGurrell and Paul Clough, directors, Grainger Financial Planning

Grainger Financial Planning uses model portfolios supported by the Morningstar OBSR fund analysis process mixed with passive funds from Vanguard.

At the last review, which was on the day of Britain’s EU referendum, the portfolios took a more defensive stance by reducing property and moving more into cash and global fixed interest.

McGurrell says: ‘The suspension of property funds so soon after the vote was disappointing. We still have a 2% exposure to M&G Property Portfolio, which is currently suspended, in the portfolio. So it could present a few issues, but only if a client wanted to liquidate their whole portfolio.’

Clough says recent upswings in the market eased their short-term fears about Brexit but says they still have concerns about how markets might respond when Article 50 is invoked.

The Grainger Financial Planning Balanced 50:50 portfolio comprises 50% Morningstar OBSR portfolio and 50% Vanguard tracker funds, with the asset allocation designed using data from Ibbotson. The portfolio, which has around 60% in equities, has outperformed the Investment Association Mixed Investment 40% to 85% Shares sector over the past three calendar years.

Funds underpinning this performance include the Fidelity Asiafund, managed by Citywire + rated Teera Chanpongsang; and the JP Morgan US Equity Income fund, managed by Clare Hart andJonathan Simon.

One fund the portfolio has stuck with despite a period of underperformance is the M&G Recovery fund. Clough says: ‘We have conviction in the manager [Tom Dobell] and believe the fund will perform in the full business cycle.’

  • ACTIVE FUNDS: 40%
  • PASSIVE FUNDS: 60%

Bill Green, managing director, H&D Wealth

H&D clients with less than £300,000 tend to go into a variety of multi-asset fund ranges, such as Vanguard Life Strategy, Royal London Governed or SEI multi-manager funds.

‘We particularly like Royal London because it’s not just about performance, but is about a whole attitude towards the new world of flexible income.’

The Royal London Governed 5 portfolio beat its composite benchmark in 2013 and 2015 but marginally underperformed it in 2014. It also outstripped the Investment Association mixed investment 40% to 85% shares sector in 2014 and 2015, but fell below it in 2013.

Those clients with over £500,000 and who prefer a more engaged service tend to use a discretionary fund manager (DFM) such as Vestra Wealth and Rathbones.

Green says: ‘I like Rathbones because investment director John Gunn runs all the investments. I have known him for approaching 20 years, and he gets it right more often than he gets it wrong.

‘Vestra is more local to us. It is progressive and always looking to come up with good, new solutions. It also runs model portfolios, which we use occasionally in addition to the full discretionary.’

  • ACTIVE FUNDS: 75%
  • PASSIVE FUNDS: 25%

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