Diversification delivers

30 January 2019
Our Governed Portfolios have reached their ten-year milestone. Lorna Blyth, Head of Investment Solutions, reflects on their performance over the past decade.

A multi asset centralised investment proposition (CIP)

Our Governed Portfolio range is one of the largest multi asset propositions designed for customers saving into a pension. Ten years is a big milestone and over that time we’ve continued to evolve the range to maximise risk and return efficiency and deliver good outcomes for customers.

When you combine our ongoing governance with features such as automatic rebalancing and tactical asset allocation changes, and look through to underlying holdings across a wide range of assets and a discounted fee which can be as low as 35bps, I think this can offer value for money for our customers and advisers.

Uncertain times

2018 was a difficult year for markets and nearly every asset class lost money. This will mean some challenging conversations for advisers, particularly when there’s an increasing pressure to justify the cost of advice.

There will be many scenarios where the chosen CIP may no longer stack up for either the adviser or the client and in a volatile market it might be time for some advisers to review whether their solution is really meeting the needs of their clients. 

Whether multi asset portfolios made money or not will depend on asset allocation decisions. Direct property was one of the only asset classes to deliver a positive return over 2018. We hold Property across all our portfolios and over the year the Property Fund returned 5.4%, helping to reduce overall losses for our customers. Customers also benefited from our holdings in index linked gilts which were marginally positive over the year.

Managing risk

Our view is that managing risk is crucial for any CIP and we keep a close eye on our risk metrics. Our ability to manage the Governed Portfolios within their risk targets is a key benefit for our customers, ensuring the portfolios continue to deliver against their objectives.

We use forward looking volatility as our key risk measure for the Governed Portfolios, and we review how this is tracking each quarter based on our updated model assumptions from Moody’s Analytics. Specifically this looks at two things. Firstly, how risky, or volatile, do we expect assets to be in the future?

Secondly, how do we expect assets to interact with each other, i.e. what are our expectations of asset class correlations? As our expectations of both asset class volatility and correlation change, the forward looking volatility of the Governed Portfolios also changes. Our data shows that, despite recent market turmoil, forward looking volatility has been on a generally downward trend which means we expect lower volatility in the long term and we expect lower correlation of assets, particularly across equities and property.

This is a great example of why any risk targeted centralised investment proposition needs to be regularly reviewed and adapted over time. Nothing stays the same in the investment industry but we have a strong foundation to build on to ensure this proposition is enduring over the longer term.

About the author

Lorna Blyth

Head of Investment Solutions

Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.

Last updated: 25 Nov 2019

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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.