Architas has built a successful multi-asset and multi-manager business in the UK, writes Cherry Reynard, but what challenges does it face as it begins a new era?
Since its launch in 2008, Architas has been among the most significant beneficiaries of the trend for advisers to outsource their investment selection. Under the capable stewardship of Hans Georgeson, and with the backing of the mighty Axa, the group has amassed around £24bn and has continued to see inflows even in tough times for the investment management industry.
Georgeson, possibly concluding that his work is done, has just stepped down as chief executive, to be replaced by Matthieu André, a former financial controller at the wider Axa group. He leaves a well-established team, a broad fund range and a diverse, multi-national business that has found resonance with many financial advisers.
Nevertheless, there are challenges for the incoming CEO. Recent performance has been lacklustre in relative terms, with the fund's performance hit by a lower weighting to equities. Sheldon MacDonald, deputy chief investment officer, said that, in their view, valuations had become stretched.
A clear point of differentiation for the Architas team has been its focus on real assets and alternative funds. They have long sought to incorporate assets that ‘march to their own beat’
They took the decision to reduce equity risk last year and focus on protecting the downside. While this proved premature, it has helped protect client portfolios in recent weeks and reflects the capital preservation instincts of the Architas team.
This type of tactical asset allocation is one of three ways the group seeks to add value across its main fund ranges (passive, active and blended). The strategic asset allocation for all the funds is set by EValue, an independent group that works out the optimum blend of investments to achieve the specific risk and reward balance for each risk profile.
This takes into account the long-term performance of different asset classes and the likely future performance given current valuations. However, it will not reflect shorter-term fluctuations in markets - the coronavirus, for example, or the latest Trump tweet. This is where the group's tactical asset allocation comes in. The group will flex the allocation to individual asset classes to reflect market conditions.
The final piece of the pie is the fund selection element. MacDonald says: "We look at what may be the right elements to populate the asset allocation. Fund selection has generally been positive in recent years."
The fund selection process works from the bottom up. The team sets great store by meeting managers and properly understanding their process. They want to ensure they grasp how the fund will react in different market conditions: "There are quantitative and qualitative elements. There is nothing in the fund that is ‘off-piste' - everything is there for a certain job. If we use a value fund, we want to be a value fund."
When using the passive funds, the process is every bit as rigorous. The fund selection team will look at the major biases in individual passive funds, whether the allocation should be fulfilled by a standard index fund, or whether smart beta solutions could be the answer. MacDonald says that too many view passive as a ‘low risk' option without recognising that it can introduce biases into a portfolio. They pick carefully to avoid these unintended consequences.
MacDonald adds: "In our passive funds, the focus is on delivery. We're not using tactical asset allocation, but aiming to deliver our strategic asset allocation for the lowest cost. This means looking at bond, equity and smart beta options, plus specialist areas, such as gold ETFs. We are not blasé about our passive holdings: we have a proper process looking at costs and tracking error."
There are clear lines of accountability and ownership in the fund selection team. Analysts have designated responsibilities and sectors. MacDonald explains: "The portfolio manager can't use an unapproved fund. Every fund choice will be sponsored by an analyst, while the CIO - Jaime Arguello - has the final say. We've built a pretty big team based in the UK and also have international colleagues in Paris, Dublin and Hong Kong that feed into the process.
"We want analysts to have time to focus on a specific sector. They tend to specialise in one or two areas, so they know everything about it. Analysts are there to provide clear support for the portfolio managers. They can cater for slightly different tastes and fund parameters, such as income, value or smaller companies."
A clear point of differentiation for the Architas team has been its focus on real assets and alternative funds. They have long sought to incorporate assets that ‘match their own beat'. These won't be in the models - possibly for liquidity reasons - but are a useful source of diversifying returns and income. They won't be driven by, for example, reflation or global growth, but will have different structural drivers.
It streamlined these ideas into the Diversified Real Assets fund, which launched in 2014. Now £336m in size, it holds 35 different underlying strategies and represents a distillation of the group's best ideas in areas such as specialist bonds or infrastructure. The group can't invest in it for its own funds, though they can cherry-pick the best opportunities from it.
In terms of the balance between the various ranges, the passive funds have enjoyed inflows recently in common with the wider market, but the blended and active ranges form the bigger chunk of the Architas assets. Over the past three years, the passive funds have performed better, in general, than the active range. This is a reflection of the differences in tactical asset allocation rather than a problem with fund selection. The performance balance has ebbed and flowed over time.
MacDonald admits that his biggest challenge today is trying to provide defensiveness at a time when defensive assets are very expensive. He says: "We don't want to buy bonds at negative yields. Even gilts at 1.5% look overvalued - we don't want to go there. On the other hand, we don't want to hold cash. So where do we go? That's why we like real assets and specialist property. We also need to look for income where you can find it."
The group has an obligatory weighting to fixed income in some of its mandates. Here, it is playing duration to add returns. MacDonald says: "We are slightly overweight here as a hedge against equity risk. At the moment, in fixed income we are just selectively trying to gain a little bit of yield.
"That said, they are wary of additional risk and high yield is a decent underweight across the portfolios." The best defence in his view? Diversification.
Like the majority of fund groups, Architas has moved to accommodate increasing investor concern on ESG (environmental, social and governance) factors. The team has hired a dedicated ESG analyst (as opposed to a fund analyst).
MacDonald says: "He's going into the underlying house looking at their processes. Looking at whether the ESG process is fit for purpose. He has the power of veto over whether a fund is included in the portfolio. It is a long process and there needs to be some back-filling of existing funds." The group is also incorporating elements of sustainable and impact investing in its diversified risk framework.
The departure of Georgeson heralds a new era for Architas, but he has built a powerful brand in his time at the helm. It remains a force to be reckoned in the crowded multi-manager field.
Darius McDermott, managing director, Chelsea Financial Services
"The Architas multi-asset/multi-manager range is one of the largest in the UK with investments in active, blended and passive offerings. The range is broadly split into three buckets, namely risk profiled funds, income generating funds and specialist vehicles - with some funds sitting across both the risk profiled and income generating ranges.
"The funds have slightly underperformed their peers across the piece with the active funds in the risk profiled range largely third quartile in their sectors over three years. It's a similar story for the income funds, although it should be noted that some offer reasonable yields - just shy of 4%. The multi-manager Strategic bond fund, which sits in the specialist bucket is fourth quartile over three years, returning 7.39% vs. 11.77% for the sector.
Paul Ilott, managing director, Scopic Research
"With volatility managed investment solutions, one of the first things we look at is how the strategic asset allocation is derived, because this is always the primary driver of returns and, it can tell us something about the expected performance journey. For Architas, the strategic asset allocation is based upon the output from EValue's stochastic model, which leads to a more balanced approach for allocating to different equity markets when compared to some more globally oriented peers, where the percentage allocation to US equities tends to be greater.
"This is important, because US equities have been the main driver of global equity returns in recent years. Up to a point, this has meant that all three Architas volatility managed suites have faced a headwind to their returns.
"However, despite this, the ‘active' suite in particular has generated good risk-adjusted scores when we look at ‘Kaleidoscope'; our risk-on, risk-off quant system. The patterns of returns and volatilities for each ‘active' portfolio also appears commensurate with what we'd expect to see in a volatility managed suite.
"Our one bone of contention is that within each volatility suite there's been little to distinguish between the volatility patterns of the Growth and Dynamic portfolios. Architas isn't alone in this. With market volatility having been so low when compared to history over long periods it's become hard to create differential in returns and volatilities at the very upper reaches of the volatility scale."
This article appeared in the April issue of Professional Adviser's bi-monthly sister title Multi-Asset Review. To make sure you receive your own copy of the next issue, please register your interest here
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