Investment Governance Meeting Summary - 3 December 2019

The Investment Advisory Committee (IAC) meet every quarter to review our Governed Range and funds.
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Strategic asset allocation

  • No SAA changes were recommended for the Governed Portfolios or GRIPs.

Tactical asset allocation 

  • Last change made on 19th September 2019.

  • In September, global equities fell for only the second month this year and the inversion of the US yield curve, which has traditionally signalled a recession, showed investors feared that escalation of US-China trade tensions could undermine global economic growth. Having taken advantage of seasonal market weakness over the summer to increase the overweight in equities, RLAM took some profits after recent strength, but remained broadly constructive on the outlook for stocks. Against this, they increased holdings in commodities as prices started to strengthen and reduced holdings in government bonds as bond yields reached new lows.

  • The overall position as at end of September was overweight Equities, High Yield and Corporate Bonds; underweight Absolute Return Strategies (inc. cash), Government bonds and Commodities. Neutral positions were maintained across Property and Index Linked Bonds.

Fund review

  • 8 RLAM funds on watch

  • 3 Funds Under Review

  • 10 Matrix funds on watch (due to underperformance)

Governed Portfolios

Number of Governed Portfolios outperforming benchmark 1 year 8/9
3 years 8/9
Since launch  8/9
Number of Governed Portfolios within target volatility ranges 9/9
  • All 9 portfolios show positive asset allocation over a 3-year time frame. 

  • Long term returns remain positive with 8/9 portfolios outperforming since launch by an average of 3.28%.

 

Governed Retirement Income Portfolios

Number of GRIPs outperforming benchmark 1 year 5/5
3 years 5/5
Since launch 5/5
Number of GRIPs within target range – Income Risk Metric 5/5
Number of GRIPs within target range – Fund Risk Metric 5/5
  • All of the GRIPs were within tolerances for their income and fund value risk metrics

Tactical Strategy:

Tactical strategy positions table

Source: Tactical change - 19 September 2019, Royal London

Global equities falling for only the second month this year and the inversion of the US yield curve, which has traditionally signalled a recession, showed investors feared escalation of US-China trade tensions could undermine global economic growth. Having taken advantage of seasonal market weakness over the summer to increase our overweight in equities, we have taken some profits after recent strength, but remain broadly constructive on the outlook for stocks. Against this, we have increased our position in commodities as prices start to strengthen. Also, as bond yields reached new lows, we have further reduced our holdings of government bonds.

IAC have agreed to remove the following funds and switch existing assets into a suitable replacement. Mailings will be issued in advance to notify the affected customers of the changes to their investment. For further details please contact us.

  • Schroder UK Alpha Plus

Although performance of the fund has picked up since the new managers took over, the change in style has led to the tracking error falling below 5%. Due to the preference for large-cap stocks and the move towards a more neutral style bias, we believe the fund can no longer meet the tracking error requirements so have proposed a replacement. Mailings will be released shortly to notify the affected customers of the upcoming changes to their investment.

  • Invesco Japan

Due to the sustained period of underperformance along with Morningstar downgrading the fund from Bronze to Neutral, we have decided to replace this fund. Investors currently holding this fund will automatically be switched to a suitable replacement approved by the Investment Advisory Committee (IAC). This switch will occur in 2020 with mailings to be released shortly to notify customers of the upcoming changes to their investment.

  • Stewart Investors Global Emerging Market Leaders

Although the fund is only triggering red for three quarters, it previously triggered at 9 of the previous 10 periods. This underperformance along with a poor rating from our internal model and the fund being soft closed and not accessible to all our members, has led to us seeking a replacement for this fund. Investors currently holding this fund will automatically be switched to a suitable replacement approved by the Investment Advisory Committee (IAC). This switch will occur in 2020 with mailings to be released shortly to notify customers of the upcoming changes to their investment.

  • Rathbone Global Alpha

The fund underperformed benchmark over the quarter as well as 1, 3 and 5 years to the end of September 2019.

The lag over one year is the result of a difficult Q4 2018, which we have previously provided commentary (below), as it also caused underperformance for the 1 year to end 2018. YTD to the end of June, the fund is 2% ahead, helped in part by the recovery of growth assets, in particular Japan. The overweight to the US continues to be a positive, with selection in UK, US, Japan and Europe all helping.

2018 ended up a relatively disappointing year for Global Alpha. Having tracked ahead of the benchmark for much of the year, a brutal sell off in the fourth quarter resulted in the fund ending up behind its benchmark for the year. In particular the more growth orientated parts of the portfolio, gave back much of their outperformance and more. Our overweight to the US helped throughout the year, with that market being the strongest globally, and our fund selection added value. Our underweight to the UK and Europe also helped, with the UK being one of the worst performing major equity markets. However, fund selection detracted in the UK, as the accelerators underperformed a falling market (as expected) and anything with a small/mid cap bias sold off. It also detracted in Japan and Asia, with the JPM Japan investment trust having a difficult year (impacted by its leverage and inherent growth bias), and the Veritas and Hermes funds (both with significant exposures to China) detracting.

Over the longer term, the Investment Committee are already aware of the drag on performance from the fallout from the UK referendum, and the difficulties in reducing our small and midcap exposures in the UK within a fund of funds structure. This continues to affect the 5 year number.

Rathbones will be removed as the manager of this mandate in Q2 2020 and replaced with Mike Clarkson using his 3Q process. This proposal received approval at Investment Strategy Committee and we are in discussions with Rathbones regarding the transition process and costs.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.