Q. Can you please explain the range of funds and how they are constructed?
7IM offer four risk rated Asset Allocated Passive (AAP) funds, ranging from Moderately Cautious through to Adventurous.
We follow a three stage process when managing money which has proven to be effective at delivering predictable returns over the long term.
1) Strategic Asset Allocation: This is our “backward looking” view where we work alongside Ibbotson Associates, a leading provider of investment research, to analyse the historic performance data of asset classes in order to build a portfolio that optimises return for a given risk range. This allows us to improve the predictability of returns for our clients while effectively managing risk.
2) Tactical Asset Allocation: Here we take a “look forward” and factor in current and future market views to take advantage of any trends by making tactical adjustments to our core, strategic asset allocation. This is achieved through our Asset Allocation Committee, which is made up of senior members of the 7IM Investment Team, together with external industry professionals with an average experience of 25 years in managing money, who provide a full range of expertise across different asset classes and extensive market knowledge.
3) Implementation: Any proposed changes at the quarterly Asset Allocation Committee meeting that our Investment Team choose to follow are gradually implemented over the following quarter, naturally dependent on market and economic conditions.
Q. What is the rationale behind using active asset allocation with passive vehicles?
We have been managing money for 10 years since the launch of our Multi Manager fund range. Due to growing demand from financial planners and their clients for a lower cost solution, following the same tried and tested investment process, we launched the AAP range in March 2008. We saw this as a natural evolution to the Multi Manager range where we fulfilled the asset allocation exclusively with passive instruments such as tracker funds and ETFs to reduce costs.
As funds under management in the AAP have grown, we have also made efforts to reduce costs further by setting up baskets of holdings that replicate some indices ourselves. This in turn removes any ETF or tracker fees and any savings are passed on to the client. We use ‘baskets’ within our portfolio for our long-term, core Asset Allocation decisions. We also use futures contracts for our tactical decisions and this provides the advantage of cost effective and highly liquid; we are able to do this because of the scale of our portfolios.
Further innovation has recently seen the introduction of ‘smart passive’ investments, where we track asset classes in an alternative way to the traditional market cap weighted indices. The simplest example being to equally weight an asset class, such as the S&P 500 where each of the 500 stocks has the same percentage holding.
Q. What investments have had the largest positive and negative effects on the funds over the past year?
We believe that generating a positive return is less about specific investments but rather ensuring the asset allocation is right. During 2013 we were overweight equity and underweight fixed income asset classes to reflect our view that 2013 would be a year of healing for the global economy and positive for risk assets. We have been significantly underweight in UK Gilts which proved effective given the fact they recorded their worst annual performance this century during 2013, and together with a global bond exposure concentrated on Spanish and Italian debt, has been positive for our fixed income holdings.
Our overweight positions in European, US and Japanese equities proved to be our largest contributors to positive returns.
Negative areas were few in what was a very good year, perhaps some exposure to Emerging Market debt and underestimating the impact of ‘tapering’ on this asset class which had a difficult year.
The tactical adjustments we make to our core, strategic asset allocation look to exploit these mid –term trends by under/over-weighting where appropriate.
Q. Where are the key areas to find value in 2014?
The large asset class returns achieved during 2013 will be harder to achieve in 2014. We feel the World is moving from a ‘healing’ phase to one of ‘transition’. There are fewer obstacles to economic progress and monetary policy will remain extraordinarily loose. This will be positive for equity markets and we expect another positive year with companies benefiting from increasing activity.
Fixed income markets will continue a gradual return to normality as yields on longer term debt drift higher.
We feel that Emerging Markets will be a major growth area in 2014, so will look to therefore maintain our overweight position. Recent underperformance despite strong economic indicators has made relative valuations more attractive compared with many developed markets.
We continue with our over-weight equity and under-weight fixed income positions.
Q. What is your view on the Fixed Interest market, and how are the risks in this area being negated in the lower-risk portfolios?
Of concern to clients in lower risk profiles is increases in the proportion of their portfolios held in fixed income. Fixed income assets, such as gilts, have benefited from the risk aversion of the past few years and with quantitative easing, have seen the yields available reduce to historic lows which has led to increases in capital values. As the World recovers and heads to more ‘normal’ market conditions based on fundamentals, we have seen yields on gilts for example, rise higher. This creates a problem for low risk portfolios where a higher proportion is invested in these traditionally ‘safe’ asset classes.
We have been very active in the fixed income space and have held under-weight positions at a broad asset class level. Within some specific areas such as gilts, in the past couple of years we have reduced our overall asset allocation, and where we do have gilt exposure, reduced the duration to protect capital values as yields increased. We are multi-asset class managers, and hold a very wide range of different types of fixed income investment within the portfolios which helps reduce risk. For example, instead of holding broad ‘global bond’ tracking instruments, we have been holding Spanish and Italian debt since 2012. This investment has proved very wise as yields on this debt have actually decreased and risk aversion has abated leading to increased capital values.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Seven Investment Management LLP has expressed its own views and these may change. The data contained in this document has been sourced by Seven Investment Management LLP and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.