In a changing regulatory and policy backdrop, we are seeing increased demand for multi-asset fund solutions as advisers address challenges including Consumer Duty and changes to capital gains tax.
In this webinar, Anthony McDonald discusses the benefits of a multi-asset approach that combines active asset allocation with investments in low-cost tracker funds.
He will explain the differentiated approach that underpins Aegon’s own Risk-Managed Portfolios. And he will explain how this is reflected in current portfolio positioning, including thoughts on the impact of high-profile events such as the UK Budget and the US election that may have significant ramifications for both investments and financial advice.
- Consider the impact of regulatory and policy change on the provision of advice.
- Identify the growing demand for outsourced investment expertise and the possible solutions for clients impacted by regulation and policy change.
- Explain the differentiated approach that underpins Aegon’s Risk-Managed Portfolios.
- Summarise the implications the UK Budget and the US election has had on markets and investors.
00:02
Hello everyone. Thanks for joining our session today. I'm Anthony McDonald. I'm the head of Portfolio Management at Aegon UK, and this session's called Knowing the Unknowns. It sounds a bit Donald Rumsfeldian, probably appropriate in the context of the US election this month. But really, it's thinking about change. Both in the context of the changing regulatory and political policy environment for advice. And then separately the changing background for investment decisions at this moment of high uncertainty.
00:35
And that's captured on these learning outcomes, talking about change, impact on outsourced solutions, our own Risk-Managed Portfolios and the implications of The Budget and the US election. I catch that in a little bit more detail in the broader agenda here. Thinking a bit about the feedback we've been getting from advisors about the increasing role for risk controlled multi-asset funds. What advisors like you, we find tend to look for and then some information on our own Risk-Managed Portfolios and how we're navigating the current environment.
01:20
Starting with a quick intro on me, this slide shows that I've been doing this for a while but there's a couple of key points that I'd like to pull out. First, I lead the Portfolio Management Team here at Aegon UK. And what we do is design and manage multi-asset solutions for savers. We are completely laser focused on doing that to the best of our ability and making those products as high quality and as low cost as possible.
01:55
Secondly, I started investments as a fund analyst and consultant at OBSR, later Morningstar. And through that job I must have done thousands of fund manager meetings over the years, and I took everything that I learned and observed – things that work, things that don't work from those meetings to build a team and process with as much confidence as possible, that’s designed to deliver the outcomes that we say we're going to deliver and that those outcomes are good compelling outcomes for your clients.
02:37
You can see on this next slide lots of numbers. The figure on right there is the total my team and I manage, just under £20 billion pounds in assets for hundreds of thousands of customers. In some ways they're just numbers but for me, the key point around them are two elements of trust. The first is that Aegon is a sustainable investment partner for advisors. We have the scale to invest significantly in this team and the resources that are available to us to do a good job for your investors, and you can see that from these statistics. Multi-asset investments are a core and large business for us.
03:21
Second it represents the trust that hundreds of thousands of savers and their advisors have in us to help ensure their financial wellbeing. I don't take that lightly. It's a heavy responsibility, but it's what gets me up with a spring in my step in the morning, the ability to try to make a difference. It's why I love to design and run products and provide them as cheaply as possible that can make a difference for as many people as possible.
03:48
I think that squares with the vast majority of advisors that I meet. We all work very hard because we are motivated to help people understand and meet their future financial needs. And that's why the changing regulatory backdrop is an ongoing challenge. One area where demand is rising, and we're seeing that rising demand, is for outsourced investment expertise. That continues to trend towards multi-asset funds and model portfolios that was kickstarted really by RDR. Many of you will know that we run our own Advisor Attitude survey every year, and this pie chart shows that two thirds of advised assets are currently in outsourced solutions, and that includes one quarter in multi-asset funds. And as we'll see later on are being used particularly for the kind of lower pot size mass affluent that we think is at particular risk of a post Consumer Duty advice gap.
04:53
Here's a little bit more color on that. I suspect I'm far from the only person who finds it incredibly frustrating that there's such a low proportion of people who could and who should receive financial advice, who don't do it, slipping to under 10% of individuals this year. We're hearing a clear message from the advisor community that regulations making it harder and more expensive to run an advice business that's sustainable and to be able to service clients to their regulatory requirements. And that leads to headlines like these – Consumer Duty leading advice firms to review client banks. Consumer duty threatens to widen advice gap by one and a half million.
05:29
Even a few weeks ago. The latest one. Consumer Duty makes it harder for advisors to serve the mass affluent. In that article that was described as an unintended consequence, and to my mind, a very big one that’s reminiscent of RDR a decade or so ago, and all the evidence since then, including from the FCA shows that there was a clear impact on financial advice for those in moderate savings.
05:51
It may be an unintended consequence, but it doesn't mean it was unforeseeable and it's disappointing to see the risk of a repeat in in regulation that’s clearly well-intentioned but may be making it harder and harder for those who would benefit most from financial advice to be able to access it. We see that separately in the Lang Cats research, that shows the average minimum threshold for advice keeps going up, now at £214,000 and I'm sure you'll all be aware of that in your practices.
06:26
That's not the only challenge within the advice proposition. Ongoing changes to Capital Gains Tax. The thresholds from the recent Budget and the rates do seem to be affecting the decision of what the right investment proposition structure is for GIA customers. You can see that through some of the headlines on this slide – advises eye multi-asset funds over models as CGT hike expected, Capital Gains tax changes could see move away from MPS. That's logical given the different structure of those investments and something that we're seeing that’s leading to increased conversations and interest in the multi-asset fund structures that we offer.
07:14
So, what is the answer to be able to meet all these requirements in the way that satisfies the regulator? You'll know in more detail than me, and you'll have a wide range of answers. But we're hearing from many advisors that in addition to technology and scale, advisors who want to keep clients, especially younger ones with smaller portfolios, are looking at different approaches to provide value for money in a sustainable way.
07:38
Back to our Adviser Attitude survey, here's that detail I touched on earlier about the rising role in multi-asset portfolios, particularly for those lower pot sizes, the green bars on this page. Everyone will obviously have different approaches to addressing the challenges and multi-asset funds won't be for everyone but given the increased interest we've seen from right across the advisor community, I'm going to spend a lot more time on this area, on how our risk managed portfolios are run and how they might meet your selection criteria.
08:12
Our survey also asked how you as advisors identify the right multi-asset funds for your clients. There’s a wide range of answers here but clearly at the top of our survey were those three Ps of Price, Process, and Performance. And that makes absolute sense from my background in fund research, it's crucial to have a clear and consistent process that's right for the type of fund, in the hands of a capable team and suiting the individual characteristics of the people in that team. I've learned from fund research, that it's not impossible to write down a process that makes sense but how it's implemented in terms of the research that underpins it, the day-to-day living of that process in the markets and understanding how it interacts with market conditions is a completely different kettle of fish.
09:08
You need to have that process in the hands of someone that truly understands it, has had a share in building it to make sure that it's implemented in as repeatable way as possible, with the end game of delivering outcomes in line with expectations and good outcomes. As Morningstar showed many years ago, the second P – Price; fees are one of the main explanatory factors for relative performance. Obviously not the only one, value for money is a broader conversation than just fees, as we all know but the cheaper cost is absolutely the right starting point, and that's something we absolutely live by here at Aegon.
09:53
The third P – Performance, for me it's more of a proof factor of the points of process and fees, in terms of delivering as repeatable outcomes as possible that are ahead of benchmarks, proof of added value. But it also shows the style and sensitivities of different funds. Differentiation I think is important and we do have a differentiated process. You can see that in our positioning and then through the performance that we deliver. This all comes together in the big package that investors ultimately see as the performance.
10:35
A quick reminder of the learning objectives before I go into a little bit more detail on our Risk-Managed Portfolios. They've been going for more than four years now, and we think they do stack up well on those three PS. They are a range of six risk targeted funds of funds, designed deliberately to be simple and easy to understand. We’re focused on getting the risk absolutely right so that the investors receive the outcome that they expect in terms of fund characteristics and that's right for their risk profile. We seek to try and add value through asset allocation and provide all that at a very competitive price point.
11:23
Thinking about the three Ps in more detail, process is one of our key strengths. As a result, we're incredibly disciplined on making sure that each of the funds stays within its risk parameters, both in terms of how we make investment decisions and how we monitor positioning on an ongoing daily basis. We're very clear on what we think we're good at and how we look to add performance through a longer-term value focus within a process where we have several external independent inputs to help provide robustness.
12:06
I’ll bring that to life a bit. The UK Budget or the US election help highlight that there are lots of risks in trying to guess the outcome of day-to-day events. And even if you get the outcome right, the market reaction can be completely surprising depending on lots of other factors – previous positioning, valuations, different short-term factors, different priorities within the market.
12:31
Research shows there's a lot less luck in stepping back and taking a longer-term view of markets and focusing on those that are unusually cheap versus history. Because events don't happen in isolation, there's a particular economic background. Right now, interest rates have been high for possibly too long, and they're in the process of coming down. In the UK, gilt yields are unusually higher than other countries, and our long-term value process has spotted that. We think that over time investors will be rewarded as that process of lowering rates comes through. That's a bigger theme, where the timing may be affected to some degree by the Budget, but the bigger picture of valuations and direction of travel needn't be affected.
13:16
To give a little bit more color on the governance that underpins that process, to help give our customers peace of mind that the outcomes should be broadly in line with expectations, we've got several layers of governance across the process, including independent external providers. You can see the Risk-Managed Portfolios are at the core. Next, Aon and BlackRock who have their own processes that they use and that we tap into. Aon is the asset allocation advisor for the portfolios that provides independent asset allocation advice to help give everyone comfort that we’re challenging ourselves and taking on broader views. Blackrock then run most of the underlying passive funds that populate the portfolios. Using passive funds helps us keep the fees cheap, 0.25% fee for all the asset allocation governance underlying providers.
14:13
After that you have the Portfolio Management Team. On a day-to-day basis we manage funds against their limits, we monitor them, we have ongoing processes to look at different scenarios and how the funds might perform in those scenarios. All designed to think not just about a forward-looking standard deviation number, although that's important, but also to think about how different assets coming together might behave within that context. Trying to think very carefully about making sure we're delivering a good outcome that's in line with what we've set out to do.
14:49
On top of that we have our independent Fund Governance Group. They ask us lots of difficult questions about our views, the way they're implemented in the portfolios, about what that means for the risk levels of the portfolios. Exactly what you'd expect to make sure that we're getting the challenge that we should be receiving to ensure the portfolios are positioned consistently in line with our views and in a way that's appropriate for the risk profiles that they sit within.
15:18
And then the Board oversees all of that to make sure that everything is in line with expectations. And that should be the structure that gives you comfort that the funds have the right place within the risk-controlled universe.
15:40
Now, as I said before, our philosophy is rooted in valuations. We take a long-term approach to investing your client's money, and that's anchored by our valuation analysis. We think that markets from time to time, and more often than the theory would suggest overshoot a fair value towards too expensive or too cheap, based really on those classic cycles are of greed and fear, and that investors investing within imperfect momentum may often chase past performance rather than thinking about future value.
16:19
We do try to identify when we think different assets are a long way away from an estimate of their fair value, such that they do look expensive or cheap and to capitalize, within the context of diversified risk-controlled portfolios, tilting the funds exposure towards those cheaper assets and away from those more expensive assets. That sometimes requires a bit of patience, as you've almost certainly heard people say before, valuation measures are not timing tools. We do think that over a long term they do have high correlation to future performance, and by overpaying for expensive investments we can deliver a more attractive performance profile for investors.
17:22
Given the emphasis that we have on value, it's probably no surprise that when we think about the current market conditions and where opportunities may or may not be, that I start off with a slide showing you the valuation versus its own history of US equities.
17:39
This chart shows the cyclically-adjusted price earnings ratio (CAPE). The price earnings ratio is a reasonably standard valuation metric in equity markets. What cyclically adjusted does, is it smooths out that earnings denominator to try and get away from short-term cyclical fluctuations and earnings and to get a smoother picture of the general trend. We look at it because it's one of several measures that correlate quite well with long-term future returns from the equity market. Back to that concept of buying low and selling high around those cycles of greed and fear.
18:22
This data set here goes all the way back to 1900 and you can see it's only been at the current level twice before, once in the dot-com bubble of 2000 and then in the post covid bubble of 2021, both of which were followed by sharp equity losses. And you can see here that the metric is rapidly approaching those levels again.
18:45
That reflects the fact that US equities, have been an excellent investment for quite a long period of time now. That means they're a large part of most equity benchmarks and portfolios, at a time when valuations measures like this are suggesting that we should be increasingly worried about the risk of below average future returns. That's one reason why we're thinking quite carefully about changes, particularly changing the investment backdrop, and whether they're likely to continue rewarding the same investments as before. When we get to expensive valuations like this, we think it makes assets more vulnerable, and particularly vulnerable at times of change to a switch in different investment leadership.
19:32
One area that's received less focus, but I think is actually in a similar position to US equities, is corporate bonds, or investment grade corporate bonds as show on this chart. And here we show the credit spread in the US, so the additional yield you receive for buying a corporate bond instead of a government bond.
19:52
When that chart goes up, that shows that there's a high additional yield for investing in investment grade corporate bonds, then government bonds, you're being paid relatively well to take that risk. But look at it now, the lowest level since 2005 before the financial crisis, which was a completely different world for corporate bond liquidity, and there's been a surge of demands for corporate bonds since 2022 in particular due to the suddenly higher yields and offer in the higher rate environment.
20:21
But now we're at levels where we think it's important to be very careful about the level of credit risk in portfolios at these low spreads. You can see at times on this chart, spreads can stay low for a while in benign environments, but we do think there's a time where you are picking up pennies in front of the steamroller, and you’re reaching for a small extra yield that eventually becomes squashed when you get these kind of big spread widening events that happen periodically.
20:48
So, two areas of the market, US equities and corporate bonds where we think valuations are looking very stretched and where investor positioning may be at risk if there are material changes to the economic or market backdrop that's been underpinning the substantial flow into these parts of the market.
21:23
So, let's think about change. I’ve put a quote at the side here ‘Change is the only constant life’ and the reason why I've done that, is because at any point in time we could highlight risks, things that look like they might be changing in markets or economic data. What I try to think about is if I was reminded of that in a year's time, would it really have mattered? And more often than not, the answer is no.
21:54
Particularly in the case of economic data. Huge sways of it come out every day and create a lot of noise for investors, and those without strong processes can find themselves being battered around and reactive to that noise. That's one reason why I think building a strong process where we know what we think matters, we zero in on an ongoing basis and we understand why we make our investment decisions is important.
22:22
But what I think now is the opposite. These four things shown on the slide are coming together and may very well, some or all of them, create a much more meaningful and longer-term change in the economic and market environment in which we're operating, than we usually see.
22:44
First, we've got falling interest rates. The last two to three years have been the opposite of that. We were in a period of rising then high interest rates and economic forecasts and market performances have been delivered in that context. A falling interest rate environment is very different. It can be more stimulative for economies; it can be more supportive for different types of assets. We have to be aware that is a change that looks like it's already happened.
23:18
The Federal Reserve, the Bank of England, the ECB, central banks in Canada, Sweden, Switzerland, have all cut rates at least once maybe more and that's likely to continue, notwithstanding some of the other events that we have on this slide. So, that’s a change in investment backdrop, and everyone should think carefully about whether what the investments that previously worked will continue to work in a new environment.
23:47
That's also the case for the US election, where there were two very different policy platforms on offer, and ultimately voters voted very clearly for Trump and the Republican platform. That's a change from the previous Democrat regime, which is important and a much more significant change to the economic environment and framework that we've been used to for many years. When we think about the potential for widespread high tariff regimes, and we saw a little bit of that in Trump's first regime, but that's very different from the economic environment that has been broadly taken for granted when we think about the way assets are performed within that. We do think this is another very clear example where it's hard to know exactly what the change might be, but it's very difficult to expect that there will be no change here.
24:56
Another area where, for the next four years, we think change will be important rather than continuation of the same, is the UK Budget. Maybe to a slightly lesser degree but we now have a Labour government with a very strong majority that has set out a policy agenda through the budget which is different from what we saw before. There is more taxation, more spending on the back of that taxation and a different set of policy priorities which will again create changing winners and losers within the UK economy and may impact the way that pulls up to the overall asset class, performance level.
25:41
And finally, China's economy has been in the absolute doldrums for a prolonged period of time now. I think the best way I can capture that is if we think about Chinese consumer confidence, and in nearly all economies after Covid, it fell off a cliff. That makes absolute sense given the health and economic uncertainties that were created by Covid and the response to it. Now, as you would expect, most other economies, consumer competence has gradually picked up again through vaccines, reopening, gradually getting back to a new normal. But in China, consumer confidence has barely picked up from that initial falling off a cliff in Covid. To me that highlights how significant the economic challenges in the country are. They're dealing with a serious property downturn and that amongst other things has meaningful implications on consumer confidence, willingness to spend. Hence, they're struggling to create the virtuous cycles that lead to the healthy levels of growth that economy has enjoyed for much of the past 20 plus years.
27:08
Those problems have become so clear and to some degree entrenched, that the authorities seem to feel the need to do more than possibly just think around the edges in policy. We've seen a number of significant policy announcements over the last few months, including much larger cuts in interest rates, indications of support for equity markets directly, increasing noises about fiscal policy support, so government spending to help to some degree pick up that consumer confidence. That means China is likely to be operating in a different policy environment going forwards than it has been for the last few years. That's another important change that may not be captured in the kind of structure of market valuations that broadly reflect where we have been, rather than where we may be going to.
28:10
That helps you see that valuations come first. We then think about the context of valuations assisting, and right now we're thinking very hard about that context of change and where some of the more under or overvalued asset classes in the market may encounter more headwinds or tailwinds to unlock the value opportunity that's sit in there. as a result.
28:36
As a result, our asset class convictions (our teams view on the asset classes we prefer or don't prefer) you can see that underweight in the US. You should expect that given the valuation anchor that I've told you about and the chart I showed you on the US valuations. We prefer some of the cheaper equity markets, such as emerging markets and the UK, especially UK mid and smaller companies where we think there may be a policy impetus for change to help unlock the valuation opportunities that we see there.
29:14
If I put that all together, and back to that third P, performance. As I said, we tend to see that as a derivative of the other Ps. I show here broadly that the funds have set out what they set out to do at launch. This shows the annualized return on the vertical axis and annualized standard deviation, the horizontal axis since launch. With six funds, with return and risk measures it can be a bit tricky to synthesize everything into one slide.
29:44
What we do see, if you go from the bottom left to the top, that's Risk-Managed 1, 2, 3, 4, 5 and 6. The funds that are meant to have taken more risk, have taken more risk and have been rewarded for that risk which is what we should expect. And broadly, the shape of an outcome over long term that you should expect from anything in the risk-controlled universe. Hopefully this gives some comfort that we are delivering to that risk-controlled mandate. And you can see the spacing is quite good across the volatility spectrum.
30:19
What we also look at, is the performance of the funds against similar funds. Again, it's difficult to get all the information on a page. We capture here Risk-Managed 4, which is the largest of the funds in the range. And what we see here on the right, is the longer-term measures, keeping with our longer-term approach to investing, position us well within that peer group. Over on the left, you can see the last three- and six-months performance has been a little bit softer. We expect those rankings to bounce around a bit, as I've said very clearly, we don't try to trade events.
30:59
We don't think that short term trading is our skillset. And given the number of competing reasons why investors engage in markets, high frequency trading, hedge funds, et cetera, on a day-to-day basis, we think it's very difficult to repeatedly add value through short-term trading. We’re focused on our long- term valuation-oriented process, and that means over time we are looking to see the funds performing well on those longer-term rankings.
31:31
Pleasingly, as we build a track record, we're starting to get some independent recognition for what we're doing. We were nominated for the Money Marketing Awards Best Investment Pension Solution this year and also for Best large firm at the Citywire Investment Performance Awards. We won the Best Aggressive Portfolio at those same awards. We’ve been very clear on the process that we've put in and why we think that process can, over time deliver attractive and as repeatable outcomes as possible. It’s really pleasing that seems to be starting to come through, such that some of these industry bodies are recognizing what we're delivering.
32:23
Thank you for your time. Hopefully that was a helpful update. Me and my team, and Aegon generally are open to any questions that you have, so please do get in touch with any follow up questions on what we do, our approach, our market views, anything that would be helpful or interesting to you. Thank you.
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Knowing the unknowns - Multi-asset investing in a changing environment
- Completed on: 20 July 2023
- CPD credit: 30 CPD mins
CPD Learning covered
- Consider the impact of regulatory and policy change on the provision of advice.
- Identify the growing demand for outsourced investment expertise and the possible solutions for clients impacted by regulation and policy change.
- Explain the differentiated approach that underpins Aegon’s Risk-Managed Portfolios.
- Summarise the implications the UK Budget and the US election has had on markets and investors.
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