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Climbing The Wall Of Worry

  • By Jason Stockwell

As volatility returns to financial markets, Christopher Lyes explains how a new breed of multi-asset, risk-targeted funds from Invesco is of fering a ‘one s top shop’ to financial advisers by managing risk through diversification


These are challenging times for those in the financial advice industry. Demands on time and resources are increasing due to an everevolving regulatory environment and an uncertain outlook for financial markets.

Indeed, 2018 was a sobering year for markets. The outlook for global growth had become more mixed with growth disappointing almost everywhere except for the US, which continued to be propelled by fiscal stimulus and still-supportive domestic financial conditions.

Europe struggled, Japan was affected as well, and China decelerated more sharply than most had anticipated. Emerging markets had a particularly tough year, accentuated by political uncertainties and currency depreciation.

Managing Risk

Thankfully, challenges normally bring opportunities. And as volatility returns to financial markets, managing risk effectively has become an increasingly important tool.

For many financial advisers, this can provide them with the opportunity to spend more time building relationships with clients and driving their businesses forward.

Many advisers use multi-asset, risk-targeted funds to allow them to do just that.

The ability to move across markets and assets becomes ever more appealing as the number of uncertainties facing investors racks up. Brexit, trade war talk and the prospect of a governmental shift are just some of the issues investors are currently grappling with when making asset allocation decisions.

This wall of worry is likely to continue in 2019 and it’s one that we believe the market will continue to climb. The market is very short term at the moment and there is a demand for products that can invest across a range of markets and outcomes; products that can take a broad view rather than financial advisers picking individual holdings themselves.

The ability to move across markets and assets becomes ever more appealing as the number of uncertainties facing investors racks up

Facing The Challenges

Let’s consider how the new breed of multi-asset, risktargeted funds can help address some of the key challenges currently facing advisers.

Challenge One: Making Asset Allocation And Fund Selection Deciusions For Clients

It’s well known that exposure to a broad range of asset classes has the potential to deliver a smoother investment experience and better risk-adjusted returns.

But deciding what that mix of assets should look like can be difficult and time-consuming. Traditional asset classes (like equities and fixed income) have been more correlated with each other over recent years than we are perhaps used to. They can also look expensive after a decade of strong performance.

Generating returns over the next decade is likely to be more challenging.

Multi-asset, risk-targeted funds can help by providing asset allocation and fund selection in one portfolio.

Challenge Two: Aligning Clients With Investments That Match Their Risk Tolerances

In contrast to more traditional mixed asset funds that tend to be managed within broad asset allocation boundaries, risk-targeted funds aim for a specific risk profile or outcome.

This more consistent approach to risk means that investments should remain appropriate for clients for as long as their financial objectives and tolerance to risk remain unchanged.

A Key outcome of the FCA’s Retail Distribution Review is that transparency has never been more important – and the due diligence burden has never been greater

Furthermore, these funds tend to sit within a broader range that aims for a variety of risk targets, allowing advisers to offer a consistent service to clients with different attitudes to risk.

Challenge Three: Transparency And Client Communication

A key outcome of the FCA’s Retail Distribution Review is that transparency has never been more important – and the due diligence burden has never been greater.

Risk-targeted funds have the potential to ease that burden by offering a high degree of visibility into their investment processes and the investments they hold.

In some cases this is supplemented by due diligence materials, client-friendly resources, and online tools that make client reporting easier.

Less Time On The Challenges, More Time On The Opportunities

A significant proportion of advisers already benefit from using risk-targeted funds. By spending less time on resource-intensive activities such as fund research and administration, they are able to spend more time on those things that clients often value the most.

The new breed of multi-asset, risk-targeted funds offer access to a staggering range of products and can benefit from cutting-edge strategic asset allocation and risk management. They include a mix of active and passive strategies, available at a variety of costs to deliver a truly diversified source of returns.

At Invesco, diversity of thought isn’t a buzzword, but an ethos reflected in how we work and how our investment capabilities are structured.

It’s not about having a different opinion for the sake of it. It’s about harnessing the benefit of multiple perspectives to create real-world advantages.

We don’t impose a house view or style, because in our experience, when you have more than one point of view, you tend to see more opportunities.

Matching Portfolios To Clients’ Risk Profiles

Invesco’s new Summit fund-of-funds range offers access – through Invesco products – to equities and bonds from around the globe, as well as property, commodities and more esoteric areas like private equity and structured loans. This breadth of in-house options can potentially provide fund manager Nick Mustoe and the team with a greater toolkit with which to enhance returns.

Invesco’s capabilities span all major asset classes (both traditional and alternative), across active, factor-based and passive strategies.

While it is important to achieve diversification between asset classes, we aim to also achieve diversity within asset classes. For example, in addition to the more traditional parts of fixed income such as government bonds and credit, we are also able to invest in other opportunities such as senior secured bank loans and emerging market bonds.

Similarly, in the alternatives space we have access to a broad range of capabilities from absolute return strategies to real estate.

A Different Approach To Risk

Our approach to risk is different too. Risk is complex and multi-dimensional so we think about it in a number of different ways, from the potential for capital loss to volatility.

When thinking about volatility, we look at it in relative rather than absolute terms, and express our targets as a proportion of global equity market volatility (that of the MSCI AC World Index).

Each of the five funds in the Summit range targets a pre-defined percentage of global equity market volatility. Crucially, the long-term strategic asset allocation is designed to ensure the funds are evenly-spaced in their targets and remain so.

At no point should an adviser who has carried out a careful risk/reward profile of their client and, for example, recommended Fund Four – which targets 75% of global equity market volatility – find they are experiencing similar volatility and returns to a Fund Three (targeting 60%) or Fund Five (targeting 90%).

While some funds have an absolute volatility target, ours is relative. An absolute volatility target (not to be confused with an absolute return target) could mean that an investor is forced to buy higher-risk assets at the wrong time (during the calm just before a storm), simply to meet a risk target.

A relative volatility target can mitigate this and helps us to remain more closely aligned with our intended risk profiles over the long term.

An Outsourced Solution

As the outlook for global growth has become more mixed, we believe that over the medium term economic growth will be sufficient for most equity markets to deliver decent returns. Yet the return of volatility has left some advisers wondering how best to reduce volatility and risk within their portfolios. The new breed of multi-asset, risk-targeted funds can help address these concerns by using the tools at their disposal to add as much diversification as possible. So while volatility is not going to go away any time soon, outsourcing the investment management function enables advisers to reduce corporate risk and cut costs. This allows advisers to focus on the aspects of their business where they can add most value – financial planning.

At Invesco, diversity of thought isn’t a buzzword, but an ethos reflected in how we work and how our investment capabilities are structured.


About Christopher Lyes

Chris Lyes is the Head of UK Retail Distribution for Invesco and has been with the firm f or over 15 years.

He is responsible for sales across the UK which supports a broad range of clients from IFAs to Financial Institutions and Life Companies who build investment portfolios for UK investors. He leads a team of sales professionals based across the UK who service and support those clients. Chris has worked on both the retail and institutional side of the business, his current focus is on UK business and he has also w orked with colleagues on business in the ins titutional markets across EMEA.

Prior to joining Invesco he held roles at Merrill Lynch Asset Management and Fidelity. He holds a degree in Law and is a qualified accountant


Investment risks

The Invesco Summit Growth range has the ability to use derivatives for investment purposes, which may result in the funds being leveraged and can result in large fluctuation in the value of the funds. The funds may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss.

The securities that the funds invest in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity for the securities in which the fund invests, may mean that the fund may not be able to sell those securities at their true value. These risks increase where the fund invests in high yield or lower credit quality bonds and where we use derivatives. The funds invest in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise.

For the most up-to-date information on our funds, please refer to the relevant fund and share class-specific Key Information Documents, the Supplementary Information Document, the Annual or Interim Reports1 and the Prospectus, which are available using the contact details shown.

1As the Invesco Summit Growth Range launched on 19 July 2018, the first reports will be issued on or before the following dates. Interim: interim to 31 January 2019, Annual to 31 July 2019.

Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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