Standard Life Wrap Account – Quarterly Investment Review – May 2021

The first quarter of 2021 saw strong returns from the equity portion of your portfolio, continuing the rebound experienced in the second half of 2020. This has been a result of the generally successful roll-out of COVID-19 vaccines and the gradual opening up of some major economies worldwide. With this, however, has come the concern that increases in inflation (the cost of living) may arrive sooner than anticipated. When inflation is expected to rise, Fixed Interest investments tend to dip and this has been observed recently and may continue for some time.

To help provide some protection in the Fixed Interest position of your portfolio, it is recommended that we re-introduce Government Bonds, which have been absent from our portfolios since December 2015. Government Bonds typically do not react as badly to rising inflation when compared with Corporate Bonds, and so one of our proposals this quarter is to reduce the holding in Corporate Bonds in favour of Government Bonds.

In the property section, I am pleased to relay to you that the M&G Feeder of Property Portfolio fund has recently become tradeable again, following a 17-month suspension. This suspension was driven by investor fears brought on by Brexit and, later, the COVID-19 pandemic. Exposure to property within your portfolio is still recommended as it provides an entirely different asset class and helps increase diversification, however changes to the funds held are being recommended.

Finally, the UK equity market has performed strongly in recent months and comfortably outperformed globally. However, the outlook for the next 10 years is not as strong as it may be for other developed markets, particularly as the value of Sterling continues to fall relative to foreign currencies. The 10-year outlook is that international equities will be more favourable to investors, and so it is recommended that your exposure to the UK and Japan is reduced in favour of the US and Europe.

The following charts will help to illustrate the effect of the changes being recommended for the asset classes held in the portfolio:

As you can see, whilst the overall asset mix is not due to change significantly, exposure to North American Equity and European Equity will increase while UK Equity and Far East Equity decreases.

To achieve this, the following fund switches are proposed:

– Remove the L&G Global Inflation Linked Bond fund

– Introduce the iShares Overseas Government Bond Index fund

– Introduce the Artemis US Select fund

– Replace the M&G Feeder of Property fund with the L&G UK Property Feeder fund

– Replace the 7IM Moderately Cautious fund with the Royal London Sustainable Managed Growth fund

In addition to these specific changes, amendments to the weightings across some of your other holding are recommended. The full breakdown of the changes to be made are shown in the following table:

 

Old

Change

New

Fixed Interest

37.50%

37.50%

BNY Mellon International Bond

3.64%

3.64%

iShares Overseas Corporate Bd Index

3.64%

5.10%

iShares Overseas Government Bd Index

5.10%

AXA Global Short Duration Bond

2.18%

3.64%

Royal London Short Duration Credit

5.10%

5.10%

Fidelity Moneybuilder

3.64%

2.55%

Schroder Sterling Corporate Bond

4.37%

3.28%

L&G Global Inflation Linked Bond

3.64%

AXA Sterling Credit Short Duration Bond

4.37%

4.37%

M&G Global Floating Rate High Yield

1.82%

1.82%

M&G UK Inflation Linked Corporate Bond

5.10%

2.91%

Property

7.50%

7.50%

M&G Feeder of Property

5.50%

L&G UK Property Feeder

5.50%

First Sentier Global Property Securities

2.00%

2.00%

UK Equity

17.00%

13.00%

Castlefield CFP SDL UK Buffettology

5.00%

5.00%

Ninety One UK Alpha

6.00%

3.00%

Man GLG Undervalued Assets

6.00%

5.00%

North American Equity

5.00%

10.00%

HSBC American Index

5.00%

5.00%

Artemis US Select

5.00%

European Equity

3.00%

7.00%

BlackRock Continental European

3.00%

7.00%

Far East Equity

7.50%

4.50%

T Rowe Price Japanese Equity

4.50%

1.50%

Fidelity Asia

3.00%

3.00%

Emerging Markets

7.50%

5.50%

Ninety One Emerging Markets Equity

3.00%

3.00%

Ninety One Emrg Mkts Local Currency Debt

4.50%

2.50%

Other

15.00%

15.00%

Vanguard LifeStrategy 40% Eq

7.50%

7.50%

7IM Moderately Cautious

7.50%

Royal London Sustainable Managed Growth

7.50%

 

The iShares Overseas Government Bond Index

This fund is focused on generating a secure but variable level of income through investment into overseas government bonds. iShares is one of the world’s largest managers of “passive strategies” and so their vast resources mean that this investment can be delivered extremely cost-effectively. The fund has a large exposure to US government bonds, as well as those held in Japan, France and Italy.

The Artemis US Select Fund

As the recommendation is to double your exposure to US equity, it is prudent that this is done by introducing a new fund rather than increasing the weighting of the existing one. This will ensure that more than one investment approach is being used in this sector, as well as more than one company, to increase diversification. This fund has a good track record and the manager has been involved in this sector since 2001. The fund is purposely designed not to expose its investors to any excessive level of risk, while investing across the US market spectrum.

The M&G Feeder of Property Fund and the L&G UK Property Feeder

It is still advisable to hold property within your portfolio, as mentioned earlier, as this provides access to another asset class and ensure your portfolio is adequately diversified. The vast majority of property funds were suspended from trading at some point within the last 2 years and this is not uncommon. Where the M&G fund differed was the sheer length of time it took for the manager to liquidate assets to enable the investment to be opened for trading once again.

The M&G property fund was suspended for 17 months between the 4th December 2019 and the 10th May 2021. By comparison, the proposed L&G fund was only suspended for 7 months; between the 18th March 2020 and the 13th October 2020. Given that these two funds use a similar investment strategy and operate as similar costs, it is prudent to take this opportunity to exit M&G in favour of L&G with a view to protecting the future liquidity of your investments.

The 7IM Moderately Cautious Fund and the Royal London Sustainable Managed Growth Fund

Both of these funds sit within the “multi-asset” sector, which aims to provide stability within the overall portfolio whilst working in a different way to Fixed Interest (which is equally low in volatility). The 7IM fund has underperformed its peers in recent years and their fees have not remained competitive.

Ethical, Social and Governance (ESG) investing, also known as “sustainable investing”, has increased significantly in popularity over the last few years. These investments seek to generate positive returns as well as positive long-term impacts on society. Many traditional investors believe that ESG investing limits potential returns because certain sectors are avoided; but this is not the case. ESG investments are becoming increasingly popular, driven by the almost-worldwide initiatives for social and environmental improvements.

Instead of investing in companies involved in oil, gas, tobacco and arms, an ESG fund may seek out sectors such as agriculture, tech and computing, electric vehicles, next-gen medicine, social infrastructure and clean energy.

Plenty of insurance companies are now active in this space, however Royal London has been operating ESG portfolios since at least 2004. This is long before sustainable investing became “trendy” and Royal London have a remarkable track record in this space. The Sustainable Managed Growth fund, which is being recommended now, has achieved annual returns in excess of 6.8% p.a. in the last 9 years; 2.8% p.a. above its peers.

With the 7IM fund being switched out of your portfolio, this is a good time to introduce the Royal London Sustainable Managed Growth fund. Owing to the vastly different way in which this fund operates and the investments held, just making this one switch increases the benefit of diversification in your overall portfolio by almost 19% (keeping in mind that this switch is only for 7.5% of your portfolio).

We have provided you with the Key Investor Information Documents (KIIDs) for the proposed funds. The KIIDs have been prepared by the investment companies and contain useful information about the investment funds, in a standardised and transparent manner. It is important that you read and review these documents as they are there to help you assess whether the investment funds are suitable for you. It should be noted that the annual management charge of your portfolio will slightly decrease from 0.63% p.a. to 0.58% p.a. as a result of these changes.

The next full quarterly update for your model portfolio is scheduled for August 2021. If there are any questions you’d like to ask us please do not hesitate to contact the office.