Martyn Ingram of The Investors Partnership provides an insight into Scottish Life's product fund links and the alternatives available to managed funds
The default fund option for many pension investors is the managed fund - an easy choice for advisers and investors looking for a one-stop fund that is targeted to deliver respectable returns over the medium to longer term.
Irrespective of whether a managed fund is called a managed fund, a balanced managed fund, a mixed fund or something else, the ones that are marketed mainly to a UK retail audience tend to have fairly similar profiles. They usually have a core direct investment in mainstream UK equities, some exposure to international equity markets, exposure to fixed income investments and, quite often, some exposure to commercial property.
The asset profile mix of the traditional managed fund was not enough to make it the preferred favourite when with-profits funds were in vogue in the 1980s and early 1990s. But now that the weaknesses behind the with-profits concept have been recognised by both advisers and retail investors, and even though both types of funds have generally targeted the same investment markets, the managed fund has become the preferred choice for many longer-term retail investors.
Look at all the options
Managed funds may have greater investment freedom than with-profits funds, but that does not mean that investors should ignore the range of available alternatives. Investors seem to take it for granted that managed funds will produce better returns than cash over the longer term; when stock market conditions are favourable, investors also expect managed funds to perform reasonably well relative to a direct investment in UK equities.
This leap of faith may sound familiar to past users of with-profits funds. I would argue that it should not be assumed that managed funds will produce good returns, at the individual investor level, irrespective of market conditions. There are other options.
Increasingly, retail investors are gaining access to a wider choice of investment funds via many products, including life and pension fund investments. I have highlighted some of the funds available through Scottish Life's product fund links.
Scottish Life has a history that can be traced back almost 125 years, and it continues to be a well-known brand in the adviser community. It demutualised in 2001 and transferred its investment business to Royal London. Today, Royal London manages in excess of £25bn of funds, including most of the assets held within the Scottish Life fund range. For example, Royal London manages the £1.5bn Scottish Life Managed Fund, a fund that has outperformed the ABI Balanced Managed-Pension average since the start of 2003; they also manage the £160m Scottish Life Defensive Managed Fund, which has substantially outperformed the Scottish Life Managed Fund since the start of the 21st Century.
I do not believe that the Scottish Life Defensive Managed Fund should only be used by cautious investors; defensive funds are a better option for all investors when there is an above-average risk of the market falling.
In a rising market, risk-taking may have merit, and the Scottish Life Adventurous Managed Fund, which was launched at the end of last summer, is the type of fund that investors might want to go for. The fund is managed by Royal London and has attracted about £10m of investment, and, as you might expect, I do not consider it to be just for risk takers. However, before recommending it, advisers should examine the skill set of Royal London and the asset allocation strategy of the fund and, more importantly, consider each investor's appetite for adventure, before investing.
Royal London is not a 'shoot-the-lights-out' investment house. Founded as a friendly society in 1861, Royal London has been a mutual life insurance company for almost 100 years; it remains committed to its mutual status and to making profits that benefit its with-profits policyholders.
Royal London Asset Management, the asset management business within the group, is perhaps best known for its fixed income expertise, and they have a consistently good track record over most time horizons. Royal London also has a reasonable track record in commercial property, a sector in which they have produced improved results over the last two years. But one area where there has been a need for improvement is in the management of UK equities, and this is being addressed. The existing fund range does not sufficiently take advantage of the high alpha opportunities that many boutique asset managers exploit; in a rising market, at best, the Royal London funds are expected to be with the pack. Royal London has been trial-running some alpha portfolios over the last 12 months, and they have been strengthening their UK equity team. From a risk/return perspective, the situation seems to be improving.
Making the move
If you are wedded to managed funds, then the Scottish Life Defensive Managed and Adventurous Managed funds may well be your first step away from its managed fund. All three funds invest in equities, fixed income, and commercial property, and they all have the same benchmark weighting in commercial property - 17.5% of the fund. When you examine the portfolios, you may find that the Defensive Managed Fund is more aggressive than you expect, and the Adventurous Managed Fund is not as adventurous as other, so-called, higher-risk funds.
If you want more risk via investment in UK equities, would Fidelity Special Situations fit the bill? (About £25m is invested in the Scottish Life Fidelity Special Situations Fund.) Perhaps you do not want active management and want a tracker fund; if so, the Scottish Life Schroder Hermes UK Index Tracker Fund could be an option. Maybe you do not want to make these types of choices and prefer a 'safe' multi-manager fund. For benchmark-focused investors, the range of funds from Escher TEAMS may have merit; the funds are targeted to produce returns of 1% or 2% above their benchmark.
In issue 36 of MultiManager magazine (April 2005), there was a profile of Escher TEAMS, and information about them going back several years is still available on the MultiManager website. Escher TEAMS offers an institutional manager of manager style of investment, and it is the UK subsidiary of m Cubed Capital, a major South African-based multi-manager business. For those who are interested, Royal London Scottish Life and Old Mutual are two major shareholders in m Cubed Capital, with stakes of about 12.5% and 7.5% respectively.
Sector is changing
Offer stands until 31 December
Lisa used as 'top-up'
Two FCA consultation papers
Transfer from PPP to SIPP