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The importance of risk profiling in portfolio management

Marcus Brookes, Head of Multi-Manager at Schroders, talks to Sue Whitbread about how the combination of their fund management expertise and Dynamic Planner’s risk targeting and asset allocation model has led to greater choice for advisers


SW: Marcus, could you start us off by talking us through your approach to managing the portfolios for the relatively new Dynamic Planner range?

MB: The approach that we use for the Schroder Dynamic Planner range of five portfolios utilises the same philosophy and process that we use on the Diversity Range. This is to formulate a market view and then invest with the very best fund managers that are positioned to benefit from those market conditions. Put simply, where we find assets that we are bullish on, we seek out the best managers in that area that are bullishly positioned. For the Schroder Dynamic Planner funds we can implement these views whilst ensuring that the funds remain within the volatility parameters as set by Distribution Technology’s Dynamic Planner, which is an important feature of these funds. The existing Schroder Multi-Manager Diversity range of funds is risk rated, which means they are assigned a rating that reflects their expected volatility due to the risks they are currently taking. Importantly though, this range of funds is not targeting a certain level of risk rather they target outperformance of their benchmarks which could see a 4 rated fund become 3 or 5 depending upon the market conditions.

The new Schroder Dynamic Planner range has been designed to enable advisers who use Dynamic Planner, the market leading provider of digital risk profiling and financial planning services, to risk profile their clients to select investment solutions that are suitable for their clients’ requirements. The funds target Dynamic Planner risk profiles from level 3 to level 7. The range commits to being risk managed, so for instance the Schroder Dynamic Planner 4 fund will always be managed to achieve a risk outcome that stays within the boundaries of the Dynamic Planner risk level 4. This is where our partnership with Dynamic Planner has proved to be so important, as we can use their data to model the fund’s potential transactions before we implement them.

We also chose to cap the cost of the Schroder Dynamic Planner range at 0.99% OCF to offer a lower cost solution for advisers. This means we use some passive funds alongside active funds, to enable the costs to be reasonably low for a multi-manager fund. We have always been able to select from the whole of the market, which has meant using some internal funds which we have also done for this new range. Schroders has a policy of no “double dipping” which means there is no annual management charge (AMC) made these funds. The remainder of the Schroder Dynamic Planner funds are invested in third party funds and there is a huge overlap with the Diversity range in the names that are used, with funds from Jupiter, Morgan Stanley, GLG, Hermes and Invesco for instance.

SW: What are you doing with the portfolios at the moment? Looking ahead to 2019, where do you see the best opportunities for growth and how are you looking to access those?

The U.S. equity market is an area that we are strongly underweight in. In fact we even have zero weighting in some of the funds that are allowed to do that as the market looks pretty expensive to us. We’re not forecasting any sort of disaster in the U.S. equity market. We’re just saying from a fundamental perspective it looks quite late in the day for that trade, which has been going on for a while, and the valuation is just incredibly high.

On the flip side, Japan has done nothing wrong. Its economy is going really, really well. The only thing it is missing is inflation, really, but when you look at the tightness of the labour market there, America is doing really well with 3.7% unemployment; Japan is even lower at 2.8%. So, for us, you have got a world class set of companies trading on a much bigger discount against U.S. equities than they really deserve to. I think it is good news that Shinzō Abe, who has been one of the more successful prime ministers since WW2, has just been reappointed by his party. He is giving clear direction to the Japanese economy and trying to instil good corporate governance at companies. We’re confident that Japan still looks like a really great place to be. It is relatively cheap and, as I say, world-class companies trading on a discount, it is great.

As advisers know, gold is attractive as an inflation hedge. In September, inflation worries started coming through, on the back of some pretty strong economic data. Gold has been a bit weak of late, but I think as a diversifier in a portfolio, particularly if you share our view that inflation is the likely outcome of too many tax breaks and a tightening labour market, I think gold could be a fantastic asset to hold.

Distribution Technology bring an awful lot of expertise and technology to the table, having established themselves as the market leader in fund risk-profiling

SW: Your relationship with Dynamic Planner is an interesting one. How does that work? How does the technology help you to deliver benefits for advisers and their clients?

MB: The partnership with Dynamic Planner was very much a case of ‘right place right time’, for them and us when we launched the fund range nearly a year ago. We had been discussing the idea of launching a risk-targeted range of funds for some time, as we had watched this part of the industry grow and it seemed the natural step.

Distribution Technology bring an awful lot of expertise and technology to the table, having established themselves as the market leader in fund risk-profiling. One of the greatest benefits to using this fund range is the enhanced reporting tool that investors will receive. It’s of a very high standard and can have each adviser’s logo on it, meaning it really feels like a private client experience. This is not something that Schroders could provide, and really helps the fund range to stand out from the crowd.

Find out more about the Schroder Dynamic Planner fund range

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