Not losing out as markets fall yet taking advantage as markets rise used to be the preserve of hedge fund strategies but such have been the advances made since the most recent financial crisis, this is now achievable within a regulated framework.
The portfolios managed within Standard Life Wealth’s target return strategy aim never be too far above or under a client’s required investment return, aiming for a line on a performance graph that shifts smoothly and gradually from bottom left to top right.
Darren Ripton, head of investments at Standard Life Wealth explains that what he is aiming to deliver is consistency of returns, with absolute returns on a 12-month basis over a three-to-five-year time horizon.
Gary Corcoran: Do you build the portfolio starting with the Libor rate or the total return needed by the client?
Darren Ripton: Libor is essentially a basket of interest rates which are priced on a daily basis so if interest rates are rising, Libor might be 60-70 basis points. I think over the next three years it’s likely to be around 100 basis points, on average, so if I’m delivering a Libor + 3% mandate I need to have assets which are going to deliver 4% return over those three years.
It’s important the way we look at the make-up of underlying portfolios. We want to do it for a return but as importantly is the risk so any new strategies into the portfolio are screened by our risk team to ensure we haven’t got concentration risk in any one area. Our internal limits are 40% of the overall risk budget. No more than that will go into any one type of strategy.
GC: Even though the strategies you refer to are target return not absolute return, is this GARS by a different name?
DR: It’s very similar as a lot of the strategies that we have within, say, a Libor + 3% mandate will be nearly identical but the way we’re actually structuring it is very different. GARS is a Libor + 5% mandate for institutional and retail funds so for a targeted return we can take the same approach and then target it at certain return protocols. Perhaps a client only wants to have a Libor + 1.5% return. We’ll construct a portfolio which is similar in some ways but will then have lower-risk asset classes within it as well.
GC: With inflation so low at the moment, how does that affect your asset allocation?
DR: CPI is actually at an artificially low level. The oil price has a big impact. It was $45 a barrel and we’re now at $60/$65 so essentially you’ve had a 50% rise in oil prices since mid-January that is going to start to come into the picture later on in the year.
GC: How important is daily liquidity to a long-term investor?
DR: Liquidity is important. A private client will come to me one day and say: ‘I’ll give you [my money for] three to five years as I’m completely comfortable with that timeline.’ He’ll then talk with his daughter who’s looking to, say, buy a house and all of a sudden that portfolio needs to be liquidated in a month. As we found out from certain hedge funds and property funds in the last downturn, clients were surprised when they were unable to get their money when they wanted it. We’ll never be in that situation with target return portfolios, as we only invest in very liquid strategies.
Have a look on pages 18-22 of International Adviser (August), published next week, for further details of the discussion.
