Asset Allocator made the very short journey to Quilter's offices recently to catch up with Simon Doherty and Anthony Webb, who run the model portfolio at Quilter Cheviot.

Quilter Cheviot tends to invest directly in equities rather than via funds on the basis this helps keep costs lower and also means they can create a "core" equity portfolio, rather than try to decide which style they want at any particular time. 

Doherty says: "Most clients don't want to live or die by a particular style. We have a core equity fund we manage, and there are actually not that many core equity funds on the market if we had wanted to buy one, because those funds tend not to be that profitable for fund houses."

Their approach is to alter the type of stocks and bonds they buy as market conditions change, rather than make alterations at the asset allocation level. 

Indeed among the global equity funds used by DFMs in our database, only 25 per cent are considered by Morningstar to be style neutral - and the majority of these are index funds.

Among the actively-managed style neutral funds are Artemis Global Select, Sanlam Global High Quality and Lazard Thematic Inflation Opportunities - all held by just one DFM each.

Since the middle of last year, Quilter Cheviot have been reducing the duration of their bond holdings to make the portfolio less sensitive to interest rate risk, while also focusing on sovereign and investment grade bonds to minimise credit risk.

Their balanced portfolio has roughly twice as much allocated to bonds as does the company’s conservative portfolio.

It is in the alternatives space that they allocate to externally managed funds. 

Around 13 per cent of a balanced client's portfolio would be in alternatives at any one time. This is split between long/short equity funds, absolute return funds, private equity and property funds. 

The aim is to own a wide range of funds in each of those categories in order not to be exposed to too much idiosyncratic risk. 

Doherty says one of the problems absolute return funds have had over the past decade is that poor performance has led to outflows, which has prompted fund managers to invest in line with the market in order to mitigate the risk of underperformance relative to peers, but that by doing this, they becoming less diversified and so diminish the reasons many investors have for owning such funds. 

Doherty's solution to this is to buy investment trusts which, because they can’t have outflows, don’t end up changing their investment process.

One such vehicle he has recently bought is the BH Macro investment trust, a fund which appears in the portfolios of two of the other allocators on our database.

BH Macro's capital is entirely deployed into the Brevan Howard hedge fund strategies of its parent company. 

It had a net one new buyer and one seller in 2022. Quilter Cheviot invested in BH Macro during a share split in the first quarter of this year.