Scottish Equitable plans to become one of the top three players in the UK's life industry with its two distinct approaches to investment. Cherry Reynard takes a closer look
'Equitable' has become something of a dirty word in financial services, following the Equitable Life scandals of recent memory. But Scottish Equitable (no relation) has managed to transcend its name to become a significant player among the life insurers. It harbours ambitions to become one of the top three providers in the UK.
Scottish Equitable has not been immune to the problems that have hit the life industry over the past few years. Some of its largest and most high profile funds have underperformed. It has had the usual problems with its with-profits business. As with many of the other life companies, it has decided that linking to other investment houses provides a solution.
Scottish Equitable's investment business has been built with two distinct approaches. Mark Pearson, head of investment marketing for the group, calls them 'Ronseal' and 'Ronseal Plus'. For the more sophisticated products, including the Sipp, the group offers full open architecture with a choice of 800 or so funds. The adviser selects the funds appropriate to his client and the group does not make any subjective judgement on whether those managers will be good. In contrast, the managed funds used in the main life and pensions products go through a rigorous procedure before they go on the platform. The group is trying to pick the biggest and most successful managed funds.
In selecting these managed funds, the group has hired a consulting actuary to make its investment decisions. Until recently this was Watson Wyatt but the group is in the process of changing. The investment team starts out by looking at the fund management group, particularly its size and strength. Companies threatened by merger or acquisition activity or those changing their business model are likely to be rejected or removed. Pearson gives the example of First State: "We took First State off the platform when they changed their strategy. They decided to revert to high-alpha products. We want to be comfortable with all the funds in our managed range."
It looks at the fund management team - how large it is, whether it is fully supported and the consistency with which it applies its process. Pearson says: "We want to find out a group's USP. We don't want a manager that says value and then switches to growth." The group is looking for reliability. A manager who has been around a long time, who has a consistent approach and is 'true to label' will score highly on the criteria. The actuarial firm also does ongoing monitoring for the funds.
For the second approach, there is not as much subjective judgement in the selection of funds, though the group is still aiming to select quality managers. Pearson says: "We are not taking a view on whether they are maintaining performance, but we still need to monitor them to ensure that they are true to label." For this the group use Old Broad Street Research, which has more experience in the retail investment sphere in contrast with the institutional expertise of the actuarial firms.
Pearson adds: "For these funds we still look at the strength of the organisation. We want a team approach rather than stars. We don't want to be in a position whereby if a fund manager leaves we have to put the fund on a sell list. We don't want funds that will whither on the vine, because we don't have the luxury of winding these funds up."
Scottish Equitable aims to forge 'investment partnerships'. Typically, a fund group will have four or five funds on the platform. It currently has 39 fund groups on its platform (see box-out) and it plans to add more over the next few months, including 15-20 sector funds.
There are currently over 800 funds available through the Scottish Equitable Sipp. The group offers risk profiling and asset allocation tools to help advisers decide on the relevant funds. Model portfolios from the Scottish Equitable tool are shown on pages 40 and 41. Pearson says: "We are looking at tools such as Morningstar to help advisers filter through the sector funds. This helps them select managers and blend them. It shows whether a company is large cap, small cap, value, growth etc."
He adds: "A lot of money still goes into solution-type funds. Our managed funds provide a simple, easy solution. Advisers will tend to pick the underlying funds based on where the cashflow goes. This covers the bulk of the market and they are simple and low risk. But we also realise that there are a large number of financial advisers who want to select funds and do their own asset allocation. For these advisers we offer a competitive Sipp contract."
Scottish Equitable was one of the first of the life offices to form links with a manager of manager provider. It appointed Northern Trust in January 2003. The group started out with two funds - ABI Balanced Managed and ABI Stockmarket Managed. The Scottish Equitable Northern Trust Cautious Manager of Manager fund was launched in November 2004. Northern Trust is a global manager of manager firm, similar to Russell (tied to Scottish Widows) or SEI. As with the other major manager of manager groups, Northern Trust takes a style neutral approach. The group aims to differentiate itself with its local 'on the ground' support and through the breadth of its product range. Recent innovations in product development have included the relaunch of the group's income drawdown plan. It also launched a new investment bond with a range of cautious funds in January.
The single-premium investment bond is aimed at investors with over £5,000 to invest for the medium to long-term. The range of underlying funds includes the Select Distribution fund, which blends a series of different managers, including Newton for equity income, Morley for property and Aegon for fixed interest and cash.
In addition to new sector funds the group plans to launch more cautious funds in the next few months. The group now has £4bn in assets under management and has recently been upgraded from "negative" to "stable" by ratings service Standard and Poor's. It is also rated AA for insurer financial strength.
A Scottish Equitable spokesman recently told The Scotsman that the group believed it could take market share from, among others, Legal & General, Prudential and Standard Life to move from sixth or seventh place in size, to the top three. It had its investment proposition in place ahead of many of its competitors. Time will tell as to whether this early-mover advantage will help it achieve its ambition.
Scottish Equitable has an investment risk profiling tool, which helps clients to choose the right products, including annuity and drawdown options. The Investment Risk Profiler asks 50 risk-related questions to identify the risk appetite of the underlying investor. These questions use psychometric analysis to identify a client's attitude to risk and any inconsistencies between perceived and actual attitudes to risk.
The system will suggest an overall attitude to risk and model portfolio. It will also suggest a range of underlying funds. It will then show the probability that the underlying investment mix will meet the client's objective. The risk profiler has been rolled out to cover all of the onshore and offshore product range.
Andy Marchant is managing director of individual pensions and investments. "We have a number of points to differentiate us. First we have strong local relationships and on-the-ground support, showing our commitment to the adviser market. We are also established as one of the strongest technical providers in the market place. Our product range has considerable breadth.
On the investment side, we have a rigorous selection process for our managed external funds, plus our relationship with Northern Trust. We want these portfolios to have a broad appeal. We are still building our investment proposition, which is why we are adding the sector funds later this year. We have a lot of high quality managed funds and want to top this up with key sectors."
Succeeding co-founder Simon Rogerson
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
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