Our approach to diversification
Strengthen resilience and target opportunities across a wide range of asset classes.
We believe that investing in a wide range of asset classes will result in more consistent performance across a wide range of economic conditions and help deliver better outcomes for your clients.
The Governed Range holds a broad mix of assets - for example: company shares, bricks and mortar property, government bonds, corporate bonds, commodities and cash. That spread is deliberate, and means your client's pension is better prepared to withstand sudden market shocks - so when one particular asset class is performing poorly, they shouldn’t be as badly affected. This also adds additional resilience and protection from inflation risk.
We also integrate environmental, social and governance (ESG) factors across all the main asset classes within our Governed Range.
Asset classes within our Governed Portfolios
To give an example of the asset classes within our Governed Portfolios, the diagram below shows the split of assets in Governed Portfolio 5 and the breakdown of underlying funds managed by Royal London Asset Management (RLAM).
Source: Royal London, strategic asset allocation breakdown as at 28 February 2021. Equity split breakdown as at 31 March 2022.
Why we invest in certain asset classes
There are three asset classes where we take a slightly different approach to other multi-asset solutions. These being property, commodities and fixed income.
You can learn more about our approach, along with how we integrate ESG factors into these asset classes, by using the drop down boxes below.
Property
Property is a real, tangible asset which has to be actively managed. Our highly experienced property team understand the lifecycle of property management and includes sector specialists covering retail property, central London offices, industrial property and alternatives.
We have property holdings across many different sectors, not just retail and office spaces – and have one of the biggest property funds in the market, with over 7 billion assets under management (as at March 2022), which has helped reduce any liquidity challenges because we don't have to sell one property to buy another.
The property component of the Governed Range invests in high quality bricks and mortar commercial and industrial properties across the UK, adding real diversification benefits to your clients’ investments. Commercial property is a good inflation hedge as we typically generate rental income above the rate of inflation. This generates capital for us to redevelop properties and increase their value.
ESG integration
ESG integration is also key in determining which properties to buy and sell, as well as minimising any negative impact these have on the local environment and communities through ongoing property management.
Commodities
Rather than owning physical commodities, we use derivative instruments within the Governed Range to track the performance of the underlying commodities with the goal of delivering returns in line with the Bloomberg Commodity Index (industry standard commodity benchmark made up of metals, energy and agriculture).
This approach avoids the high costs of owning, storing, and transporting the physical commodity, but still provides diversification benefits and a hedge against rising inflation.
ESG integration
Although holdings in these commodity futures don’t give investors a vote and can’t directly impact corporate behaviour, the RLAM Multi Asset team are well placed to influence the environmental, social and governance issues involved in the production and consumption of commodities, primarily through the shares we hold in the companies involved.
Fixed income
Bonds traditionally perform differently to equities, so we hold a wide range across both companies and governments.
ESG integration
ESG analysis is most applicable to corporate debt, providing the RLAM credit team with an additional perspective on their traditional analysis. They recognise that governance issues may pose the greatest near-term financial risk to companies in high yield markets, while environmental and social issues may have longer-term impacts on returns.
Their rigorous credit research process leads to an overall internal rating score which incorporates nine fundamental factors (e.g. free cash flow, growth prospects, etc). As one of these core factors, ESG issues can move the rating in their internal model up or down. The team works closely with the Responsible Investment team to investigate and understand any significant ESG risks, but the final investment decision lies with the fund manager and takes relative valuation into account.
Property
Property is a real, tangible asset which has to be actively managed. Our highly experienced property team understand the lifecycle of property management and includes sector specialists covering retail property, central London offices, industrial property and alternatives.
We have property holdings across many different sectors, not just retail and office spaces – and have one of the biggest property funds in the market, with over 7 billion assets under management (as at March 2022), which has helped reduce any liquidity challenges because we don't have to sell one property to buy another.
The property component of the Governed Range invests in high quality bricks and mortar commercial and industrial properties across the UK, adding real diversification benefits to your clients’ investments. Commercial property is a good inflation hedge as we typically generate rental income above the rate of inflation. This generates capital for us to redevelop properties and increase their value.
ESG integration
ESG integration is also key in determining which properties to buy and sell, as well as minimising any negative impact these have on the local environment and communities through ongoing property management.
Commodities
Rather than owning physical commodities, we use derivative instruments within the Governed Range to track the performance of the underlying commodities with the goal of delivering returns in line with the Bloomberg Commodity Index (industry standard commodity benchmark made up of metals, energy and agriculture).
This approach avoids the high costs of owning, storing, and transporting the physical commodity, but still provides diversification benefits and a hedge against rising inflation.
ESG integration
Although holdings in these commodity futures don’t give investors a vote and can’t directly impact corporate behaviour, the RLAM Multi Asset team are well placed to influence the environmental, social and governance issues involved in the production and consumption of commodities, primarily through the shares we hold in the companies involved.
Fixed income
Bonds traditionally perform differently to equities, so we hold a wide range across both companies and governments.
ESG integration
ESG analysis is most applicable to corporate debt, providing the RLAM credit team with an additional perspective on their traditional analysis. They recognise that governance issues may pose the greatest near-term financial risk to companies in high yield markets, while environmental and social issues may have longer-term impacts on returns.
Their rigorous credit research process leads to an overall internal rating score which incorporates nine fundamental factors (e.g. free cash flow, growth prospects, etc). As one of these core factors, ESG issues can move the rating in their internal model up or down. The team works closely with the Responsible Investment team to investigate and understand any significant ESG risks, but the final investment decision lies with the fund manager and takes relative valuation into account.
Equities
The equity exposure within the Governed Range covers UK, developed overseas and emerging markets. Each region consists of different companies which operate in different sectors, offering a diverse growth asset. Being active in areas we believe we can add value and passive in areas where this is more difficult ensures we can capitalise on market inefficiencies, whilst delivering returns within a controlled risk framework.
Our customers are, in effect, shareholders in a wide range of companies around the world, with every major industry represented. This means they have a say in how these companies are managed and how they impact the world around them.
Equity exposure within our Governed Portfolios is gained through the RLP Global Managed Fund, which uses both active and passive investment strategies to provide a comprehensive portfolio of global stocks. With approximately 35% of the fund’s allocation being held in UK listed companies, 55% spread globally and 10% in emerging markets, the RLP Global Managed Fund provides a well-diversified solution which allows customers to gain exposure to global equity markets.
ESG integration
The integration of ESG differs for active and passive strategies:
- Active equity fund
Around 30% of the exposure in RLG Global Managed is invested in actively managed equity funds with fund managers leveraging ESG insights to inform their decision-making process. - Developed market passive funds
Most of the exposure is invested in equity tracker funds which replicate the main stock market indices in the UK and overseas. While the exposures are invested in the full range of underlying companies, RLAM uses its voting power to influence corporate behaviour for the better.
Our passive equity funds are one of the key building blocks of our Governed Range. While these are passive funds, we do take an active approach to the way we manage these funds through our 'tilts' which allows us to reduce our exposure to the largest carbon emitters and increase our exposure to the lowest carbon emitters.
In addition to carbon reduction, our more active management approach gives us the flexibility to adjust our exposure to companies with poor social practices or corporate governance issues. - Emerging Markets ESG Leader Tracker fund
This fund accounts for around 10% of the equity component (over £2bn) and tracks an ESG benchmark made up of companies that have the highest environmental, social and governance (ESG) performance in each sector of the wider MSCI Emerging Markets Index. There can be lower standards of behaviour and governance in some countries included in this index, so we believe a hard screening approach is more appropriate.