Multi-assetMar 10 2014

Putting diversity at the heart of investment

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There are four key components to a successful investment management team: a core investment philosophy, clear process, passion and a desire to find opportunities across global markets.

That’s the opinion of Stephanie Carbonneil, who runs the Architas Multi-Asset Active range of funds, which includes the Architas MA Active Intermediate Income fund, which is currently part of the Investment Adviser 100 Club.

“It’s also important to have people of various nationalities, with different levels of experience and academic backgrounds,” she says. “It means they will have their own approach to an issue rather than everyone thinking along the same lines.”

At the heart of the Architas investment process is a solid and consistent approach based on quantitative and qualitative analysis. But beyond this it helps to have passionate people that have different backgrounds to understand the big picture and think differently.

“You need passionate, different people to make everything work,” she insists. “They need to be able to challenge each other in a healthy way but then be able to go for a coffee afterwards. Everyone in our team is outspoken – but they still get on well.”

All these various ideas and opinions, which are put forward by portfolio managers and analysts at the regular meetings which take place, are particularly useful considering that diversification is so much a part of the entire Architas multi-asset philosophy.

In fact, it is at the very heart of how the company builds its funds, which are divided into three ranges: active, blended and passive managed risk profiled solutions. Each is designed with the investor in mind.

“Diversity is in everything we do because it tempers volatility,” explains Carbonneil. “No matter how confident you may be in a manager you must accept the market is always changing and these changes may favour some managers more than others.”

Architas embraces three levels of diversification: across asset classes; within asset classes, such as by geographic region; and across investment managers. This combination, it is hoped, will reduce combined risk of the overall portfolio.

It could also limit reliance on any part of the portfolio to perform. Diversifying across asset classes increases the possibility that clients may enjoy more consistent returns than they may do from a fund that invests in one single asset class.

As well as equities, bonds and property, Architas also considers money market and alternatives, which brings into play all kinds of more esoteric investments. It even has full-time analysts scouring the market for such opportunities.

Examples of alternatives include commodities, hedge funds, absolute return and infrastructure. All such areas have traditionally been less correlated with equities and bonds and so the class could potentially provide good diversification benefits for a portfolio.

“People are very imaginative so you will see many different strategies, whether they are infrastructure projects, solar panels or even wind farms,” says Carbonneil. “These are likely to be completely different to anything else that is in the portfolio.”

Diversification is also important to protect against the effects of market trends. A prime example was the high levels of consensus at the start of 2014. “When everybody is agreeing with each other then you have to worry you’ve missed something,” she says.

Being diversified in such scenarios, therefore, is worth considering because even though you may sacrifice some of the potential upside if the consensus view appears correct over the short term, you won’t be left overly exposed if this doesn’t prove to be the case.

It’s also worthwhile when there is uncertainty in global markets. The Russia-Ukraine unrest in recent weeks perfectly illustrates the point, according to Carbonneil who says the outcome of such situations are impossible to predict. “I don’t have a crystal ball but what’s sure is that it brings volatility,” she says. “When you have volatility you want to diversify.”

On that point, it’s worth exploring current positioning of portfolios, which includes being slightly overweight both Europe and the United States.

“Even though Europe is volatile it is somehow going in the right direction,” she explains. “In the US I was more overweight last year but took some profits, while we are neutral on the UK where there have been some positive statistics released on business investment.”

Elsewhere, there is a slightly underweight position on Asia and Emerging Markets. “Yes it’s cheap but you need a catalyst,” she insists. “All the problems in Russia and the Ukraine are likely to bring some more volatility to the market.”

Of course, diversification is great but the key to using it lies in the way that portfolios are constructed. “Sometimes you can find really good managers but if you add them to what you already own it’s not going to bring anything special,” she adds. “That can happen.”

That is why the Architas investment process has been designed to aim to find the most appropriate mix of managers required to construct well-diversified portfolios. Vital cogs in this machine are the company’s in-house professionals who are consistently researching and monitoring.

This process starts with asset allocation where the team decides how much to put in the various areas, before manager research and selection takes place. This involves using various tools to explore the investment universe and identify those worthy of further attention.

Blending these chosen managers together – taking into account their various characteristics –is next and aims to produce well-diversified portfolios. After this they will be monitored closely to ensure they are still delivering as expected.

There’s little doubt that the rapidly growing and increasingly complex active fund universe requires advisers to be aware of their clients’ needs and to know more about the philosophy and process of the investment companies with which they deal.

“Advisers need to know their clients and their personal life goals, such as sending children to university or retiring within five years,” suggests Carbonneil. “They can then assess the level of risk they are prepared to take and whether they will be able to achieve their goals.”

They also need to be confident in the investment house they choose for their clients, as there are numerous approaches. Digging deep into their respective philosophies and approaches, for example, is extremely important.

“Advisers need to look between houses to ensure funds are being properly constructed,” she says. “A house may have five US funds but are they properly diversified? If not then they may still be highly correlated to one another.”

Architas was formed in 2008 to help investors meet their investment goals through their range of multi-manager solutions. The total amount of assets managed and advised on by the company is now around the£12.8 billion mark*.

“We believe that active management is a skill that rests on three key ideas: philosophy (what you believe), methodology (how you implement your philosophy) and portfolio construction (what the overall fund looks like),” she explains.

Active investing does not follow one path in its pursuit of alpha, according to Carbonneil, who believes it’s an art as well as a science. “It offers the opportunity to reduce as well as increase risk,” she points out. “For investors looking for alpha over the long term, it remains very attractive.”

As well as drawing on the expertise and convictions of seasoned, specialist managers, the process will see these investment professionals devising ways to combine various elements in an efficient and effective manner.

Architas, for example, starts with a set of allocations from a model designed by eValueInvestment Solutions. The team can deviate from these allocations and have a pre-determined ‘risk budget’ that can be spent on different portfolio tilts.

“It all comes down to the philosophy at the heart of active management: flexibility to deviate from the crowd,” explains Carbonneil. “The manager decides whether to deviate from the benchmark by taking on more risk (gearing up) if they are bullish, or by striving to reduce risk (gearing down) if their outlook is more bearish.”

Of course, a crucial element to this is having experienced analysts and portfolio managers on board that can make such calls. Advisers looking for investment partners, therefore, need to take a close look at the personnel within the house itself.

“It is possible to find portfolio managers with the ability to generate alpha on a regular basis if you have the right structure,” she says. “Advisers need to ensure there’s a strong, passionate team covering everything and a consistent ability.”

This is just the structure that’s in place at Architas. “We have passionate, committed investment professionals that work well as a team,” she adds. “We find this is a very powerful combination.”

*As at 31 December