Cautious Portfolio (Medium and Long Term)

Transcription

1 February 2016 Review prepared by Morningstar Investment Management Europe 1 Oliver s Yard, City Road, London EC1Y 1HQ Overview for Zurich Model Portfolios Cautious Portfolio (Medium and Long Term)

2 Table of Contents 2 Table of Contents 2 Introduction 3 About Morningstar Investment Management Europe Limited 3 Cautious Portfolio (Medium Term) - Overview 4 Key Facts 4 Asset Allocation (February 2016) 4 Equity 5 UK Equity 5 Fixed Income 5 Cautious Portfolio (Long Term) Overview 6 Key Facts 6 Asset Allocation (February 2016) 6 Equity 7 UK Equity 7 Fixed Income 7 Model Portfolios Fund Descriptions 8 Fixed Interest 8 Government Bonds 8 Allianz Gilt Yield 8 BlackRock UK Gilts All Stocks Tracker 8 Royal London UK Government Bond 8 Vanguard UK Government Bond Index 8 Model Portfolios Fund Descriptions 9 Index-Linked Bond 9 L&G All Stocks Index Linked Gilt Index 9 Equities 9 UK All Companies 9 AXA Framlington UK Select Opportunities 9 CF Woodford Equity Income 9 Investec UK Alpha 9 Model Portfolios Fund Descriptions 10 Man GLG Undervalued Assets 10 Old Mutual UK Alpha 10

3 Introduction to Morningstar Investment Management Europe and the Model Portfolios 3 Introduction Morningstar Investment Management Europe Limited has been engaged by Zurich to advise upon the fund selection for a range of Model Portfolios The Portfolios are available for use by UK authorised Intermediaries and are designed to suit differing risk appetites evalue FE is the asset allocation provider and Morningstar Investment Management Europe advises upon the fund selection for the Model Portfolios, drawing from the Morningstar Rated fund universe The asset allocation is provided to Morningstar Investment Management Europe by Zurich While the Model Portfolios are continuously monitored, a formal quarterly review takes place following which updated Portfolios are sent to Zurich Quarterly reports explaining the performance of the Models are made available on a quarterly basis Any suggestions for fund changes are included and explained in the Change Rationale document The model portfolio service is provided by Morningstar Investment Management Europe About Morningstar Investment Management Europe Limited Morningstar Investment Management Europe Limited provides comprehensive investment advisory, and portfolio management services for financial institutions, plans sponsors, and financial advisors Morningstar Investment Management Europe draws upon the whole of the funds market for its investment strategy analysis to deliver in-depth views on approximately 500 funds and provides asset allocation and portfolio construction consultancy services to life, pension, and fund-of-funds providers The investment research approach has been in place since 1994 and is forward-looking in nature, which leads to a strong emphasis on the qualitative aspects of research The aim is to recommend a relatively small number of funds that are of the highest quality and deliver risk and return outcomes that are commensurate with investment objectives For more information about Morningstar Investment Management Europe, its people, philosophy and research approach, please visit wwwglobalmorningstarcom/mimeurope

4 Cautious Portfolio (Medium Term) - Overview 4 Key Facts Asset Allocation (February 2016) The Zurich Model Portfolios were established in September 2012 Asset allocation is provided by Zurich and sourced from evalue FE Morningstar Investment Management Europe populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitativelydriven research process The objective is to deliver a risk and return profile in each of the asset classes that is commensurate with the underlying markets, whilst seeking outperformance over the long-term evalue FE describes a potential investor in this Portfolio as follows You are prepared to take a lower risk with your investment and so wish to avoid the risks usually associated with investing all your money in company shares Index Linked Bond 270% UK Equity 70% You are looking for an investment that is expected to be more stable and fluctuate in value far less than company shares and so is likely to involve a very high proportion of fixed interest assets As a consequence, you accept that the investment return is likely to be much lower You appreciate that over some periods of time the value of your investment can fall and you may get back less than you invest Government Bonds 660% Model Portfolio - February 2016 Asset Classes Fixed Interest % Asset Allocation Fund Suggested Fund Weight (%) Morningstar Analyst Rating Government Bonds 6600 Allianz Gilt Yield 1800 Neutral BlackRock UK Gilts All Stocks Tracker 1500 Silver Royal London UK Government Bond 1800 Silver Vanguard UK Government Bond Index 1500 Gold Index Linked Bond 2700 L&G All Stocks Index Linked Gilt Index 2700 Bronze Equities UK Equity 700 CF Woodford Equity Income 400 Bronze Old Mutual UK Alpha 300 Silver

5 Cautious Portfolio (Medium Term) Overview 5 Equity UK Equity For the UK Equity portion two funds are suggested, namely CF Woodford Equity Income and Old Mutual UK Alpha Overall within the UK Equity blend, we are seeking to provide exposure to different mandates and management styles The CF Woodford Equity Income fund is managed by Neil Woodford who typically runs a defensively positioned low beta portfolio Historically, his fund has provided better drawdowns through a combination of astute top-down calls and a robust valuation discipline However, his long-term positions can lead to a performance profile which is markedly different from the underlying benchmark The fund is complemented by the holding in the Old Mutual UK Alpha fund as it provides style diversification to the blend The fund is managed by Richard Buxton The fund tends to have a strong bias to largecap companies and he builds a concentrated portfolio with position sizes being determined by his level of conviction He typically favours investing in companies that appear underpriced relative to their growth prospects The manager s long-term approach can lead to extended periods of performance and risk outcomes that can differ from that of the market Fixed Income We have suggested four funds for the UK government bond portion of the Portfolio, the BlackRock UK Gilts All Stocks Tracker fund, the Vanguard UK Government Bond Index, the Royal London UK Government Bond fund and the Allianz Gilt Yield fund Both the BlackRock and Vanguard funds are passively managed and seek to track closely the performance of UK Gilts, while the Royal London and Allianz funds are actively managed funds that seek to generate attractive relative performance through duration, yield curve positioning and stock selection For the allocation to inflation-linked bonds we have suggested a passive fund, namely the Legal & General All Stocks Index-Linked Gilt Index fund This is a passively managed fund that seeks to track closely the performance of the FTSE-A UK Gilts Index-Linked index

6 Cautious Portfolio (Long Term) Overview 6 Key Facts The Zurich Model Portfolios were established in September 2012 Asset allocation is provided by Zurich and sourced from evalue FE Morningstar Investment Management Europe populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitativelydriven research process The objective is to deliver a risk and return profile in each of the asset classes that is commensurate with the underlying markets, whilst seeking outperformance over the long-term Asset Allocation (February 2016) UK Equity 360% evalue FE describes a potential investor in this Portfolio as follows: You are prepared to take a lower risk with your investment and so wish to avoid the risks usually associated with investing all your money in company shares You are looking for an investment that is expected to be more stable and fluctuate in value far less than company shares and so is likely to involve a very high proportion of fixed interest assets As a consequence, you accept that the investment return is likely to be much lower You appreciate that over some periods of time the value of your investment can fall and you may get back less than you invest Government Bonds 640% Model Portfolio - February 2016 Asset Classes Fixed Interest % Asset Allocation Fund Suggested Fund Weight (%) Morningstar Analyst Rating Government Bonds 6400 Allianz Gilt Yield 1800 Neutral BlackRock UK Gilts All Stocks Tracker 1400 Silver Royal London UK Government Bond 1800 Silver Vanguard UK Government Bond Index 1400 Gold Equities UK Equity 3600 AXA Framlington UK Select Opportunities 500 Gold CF Woodford Equity Income 1000 Bronze Investec UK Alpha 1000 Bronze Man GLG Undervalued Assets 600 Bronze Old Mutual UK Alpha 500 Silver

7 Cautious Portfolio (Long Term) Overview 7 Equity UK Equity For the UK Equity portion, five funds are suggested, namely CF Woodford Equity Income, Investec UK Alpha, Old Mutual UK Alpha, AXA Framlington UK Select Opportunities and Man GLG Undervalued Assets Overall within the UK Equity blend, we are seeking to provide exposure to a range of different mandates and management styles The CF Woodford Equity Income fund is managed by Neil Woodford who typically runs a defensively positioned low beta portfolio Historically, his fund has provided better drawdowns through a combination of astute top-down calls and a robust valuation discipline However, his long-term positions can lead to a performance profile which is markedly different from the underlying benchmark The Investec UK Alpha fund is run by Simon Brazier, who was previously running a similar mandate at Threadneedle before moving to Investec at the beginning of 2015 The process blends fundamental, bottomup stock research with top-down analysis Brazier is mindful of the risk/reward dynamics of the fund and aims to provide investors with a consistent return profile The Old Mutual UK Alpha fund is managed by Richard Buxton The fund tends to have a strong bias to large-cap companies and he builds a concentrated portfolio with position sizes being determined by his level of conviction He typically favours investing in companies that appear underpriced relative to their growth prospects The manager s longterm approach can lead to extended periods of performance and risk outcomes that can differ from that of the market The AXA Framlington UK Select Opportunities fund is managed by a very experienced fund manager, Nigel Thomas, and he considers top-down factors carefully when constructing the portfolio The fund provides exposure to companies from across the market cap scale and usually has a strong focus on mid-and small-cap companies, as well as an overall growth bias Finally, the Man GLG Undervalued Assets fund is managed by Henry Dixon, who seeks to identify two types of companies, those where the market is undervaluing a stock s asset base and those where the market is undervaluing a stock s return on assets The fund s disciplined investment process leads it to have a high turnover and significant biases down the market cap scale From an investment style perspective, the fund tends to hold a value bias and therefore complements the blend further as it gains exposure to different parts of the UK market Fixed Income We have suggested four funds for the UK government bond portion of the Portfolio, the BlackRock UK Gilts All Stocks Tracker fund, the Vanguard UK Government Bond Index, the Royal London UK Government Bond fund and the Allianz Gilt Yield fund Both the BlackRock and Vanguard funds are passively managed and seek to track closely the performance of UK Gilts, while the Royal London and Allianz funds are actively managed funds that seek to generate attractive relative performance through duration, yield curve positioning and stock selection

8 Model Portfolios Fund Descriptions 8 The below provides further information about the funds that have been selected for the Model Portfolios Fixed Interest Government Bonds Allianz Gilt Yield Offers investors exposure to a portfolio of UK government bonds and is benchmarked against the FTSE Gilts All Stocks Index The fund manager seeks to outperform this benchmark in a consistent manner and to limit the extent to which the portfolio and its performance deviates from this benchmark Following the announcement in September 2015 that Allianz are to take the management of this portfolio away from PIMCO at the end of November 2015, the fund's Morningstar Analyst Rating was placed Under Review Mike Riddell joined Allianz from M&G as a member of the Conviction Fixed Income team in 2015 and he is supported on the management of this portfolio by the experienced established team based in Paris The experienced Brian Tomlinson is the co-manager and will be crucial in the application of the broader team's macro and market views The primary factors which determine the fund's relative performance profile over time are the decisions taken around duration and yield curve positioning in relation to the UK government bond benchmark There will also be an impact if the manager takes the decision to hold inflation-linked gilts and government guaranteed non-sovereign bonds, as these are not within the fund's reference index BlackRock UK Gilts All Stocks Tracker Aims to replicate the performance of the FTSE UK Gilts All Stocks, providing the investor with exposure to a broad range of conventional bonds issued by the UK government A full replication strategy is applied to achieve this objective, purchasing every index constituent at its benchmark weight The fund is managed by an experienced and stable team that is responsible for sterling-based government bond portfolios The named manager, Panayotis Ferendinos, has 18 years industry experience, with 12 of those as fixed income investment manager at BlackRock The firm itself has a strong reputation for its cutting-edge risk analytics and its models are used to set risk parameters that all managers, including both active and passive, must follow Royal London UK Government Bond The investment objective of the fund is to maximise total investment return (income and capital growth) over the medium to long term by investing mainly in UK government bonds The fund's benchmark is the FTSE Gilts All Stocks index The fund has been managed by Paul Rayner since 2005 and he was subsequently joined by co-manager Craig Inches, who was hired from SWIP in January 2009 Both of these experienced managers have demonstrated the ability to combine macroeconomic analysis with an understanding of the dynamics of the UK government bond market and have worked together successfully The fund aims to achieve modest outperformance of the benchmark through a combination of duration and yield curve positions held directly within the UK gilt market They will also apply more sophisticated relative value strategies within the broader global fixed income markets, including offbenchmark exposure in overseas government bonds and UK government guaranteed corporate bonds, with the latter limited to 5% The fund's interest rate sensitivity (duration) is managed closely in line with the benchmark and is unlikely to deviate significantly Vanguard UK Government Bond Index To provide exposure to UK government issued bonds, the fund seeks to track the Barclays Global Aggregate UK Government index at the lowest possible cost The full replication strategy is used to track the index, whilst derivatives and forward transactions may be used for the purpose of efficient portfolio management This fund is managed by the London-based team, led by Nick Pearce since November 2011 Pearce has over 20 years investment experience and prior to joining Vanguard, he worked for BGI (now BlackRock) Other key members of the team include Pasi Hyttinen, who joined the firm in January 2012 from SSgA, and Raphael Stern, who is part of the European fixed-income trader desk The fund is an attractive offering for investors seeking passive exposure to the UK gilt market The team has proven its ability to track the benchmark closely whilst keeping trading costs in check In addition, it is appreciated that the fund managers are also traders, and therefore have an in depth knowledge of the UK gilt market and a keen interest in keeping transaction costs to a minimum The manager seeks to physically replicate the UK government bond benchmark as closely as possible, but derivatives and forward transactions will be used for efficient portfolio management In addition, the portfolio managers will utilise a number of techniques to ensure the returns of the fund follow the reference benchmark as closely as possible The fund has proven its ability to track the benchmark closely and the highly automated and tightly risk controlled process gives us confidence that this is repeatable

9 Model Portfolios Fund Descriptions 9 Index-Linked Bond L&G All Stocks Index Linked Gilt Index This passive fund aims to track the performance of the FTSE-A Index Linked (All Stocks) index after adjustment for management charges and taxation The fund is managed by a highly experienced passives team with a long professional record within L&G, employing a fund management process which is highly automated and tightly controlled The fund exhibits appropriate attributes for an index tracking strategy The manager seeks to achieve the performance objective by holding every issue to fully replicate the index comprised primarily of index linked bonds issued by the government of the United Kingdom where possible The manager may also make use of optimisation techniques in order to construct and maintain the portfolio, and to this end may invest in other assets, including government or public fixed income securities issued by other public bodies, including those outside the United Kingdom Equities UK All Companies AXA Framlington UK Select Opportunities Aims to achieve long-term capital growth by investing in a portfolio of predominantly UK equities In performance terms the fund seeks to outperform the FTSE All-Share index Nigel Thomas joined Framlington in 2002 and has built up a strong track record both at AXA Framlington and previously at ABN AMRO where he managed both the UK Growth fund and the UK Select Opportunities fund Thomas is an experienced and pragmatic investor and has demonstrated a willingness to modify his portfolio to suit the prevailing market environment The portfolio typically has a growth bias, however the manager seeks to invest in opportunities that can have a mixture of recovery, growth or value characteristics The fund tends to be invested across the market-cap range and as such has a strong bias to mid-and small-cap companies when compared to the index While bottom-up stock selection is the main driver of returns, the manager's thematic and sector preferences are also important CF Woodford Equity Income Aims to achieve a rising income with capital growth from investments primarily in the shares of UK companies, with up to 20% being invested in international companies In practice, the fund aims to achieve a minimum income yield target of 110% of the dividend yield on the FTSE All-Share Index, but not if this is at the expense of an investor's capital In pursuing the investment objective, the manager may also include less liquid equity investments such as unquoted companies Neil Woodford, who founded Woodford IM in 2014, has been managing UK equity income funds since 1988 and is one of the longest serving managers within the industry He has consistently demonstrated an ability to combine an overall appraisal of economic prospects with well-informed stock-picking This is evidenced by a track record of strong returns over market cycles, using his long-term approach and his consideration of investments from an absolute perspective The manager invests in companies that he thinks are undervalued but can sustain dividend growth over the medium term The portfolio is constructed with little regard to the benchmark and at the sector level the fund s weightings may deviate significantly from those of the FTSE All-Share Index Investors should therefore be aware that short-term relative performance can be volatile as a result of the manager s approach, however he has demonstrated an excellent long-term track record in the management of income portfolios Investec UK Alpha Seeks to achieve long-term capital growth through investments in predominantly UK listed companies The fund is benchmarked against the FTSE All-Share Index and in performance terms seeks to achieve outperformance of 3-5% per annum gross of fees over a full market cycle Simon Brazier joined Investec in December 2014 He has 17 years of investment experience, 14 of which have been managing funds He joined from Threadneedle, where he was latterly head of UK equities and successfully ran the Threadneedle UK fund from April 2010 until his departure Three analysts and an investment specialist from Threadneedle joined with him Blake Hutchins, with eight years of experience acts as Brazier's deputy while also managing the newly launched equity-income fund The team all have UK sector coverage responsibilities and are also able to draw on research of other members of the Quality team who are researching firms on a global sector basis in support of the firm s Global franchise fund The investment process blends fundamental, bottom-up stock research with top-down analysis, and the manager believes that a clear understanding of the macroeconomic and thematic background is a vital starting point He is mindful of the risk/reward dynamics of the fund and aims to provide investors with a consistent return profile that seeks to outperform the benchmark while also limiting the volatility The research process incorporates both meetings with company management and a thorough valuation analysis, considering at all times both the upside potential and downside risk of an idea The portfolio invests in approximately stocks diversified by themes and growth drivers, such as strong franchises, defensive growth, quality cyclicals and turnaround situations The fund is biased towards large caps and will hold no more than 10% in small caps

10 Model Portfolios Fund Descriptions 10 Man GLG Undervalued Assets The objective of the fund is to achieve long-term capital growth through investing predominantly in UK equities In performance terms, the fund aims to outperform the FTSE All-Share index through a market cycle Henry Dixon has managed the fund since inception in November 2013 when he joined Man GLG He utilises the same philosophy and investment process which he developed in the management of the FP Matterley Undervalued Assets fund since 2008 Dixon was one of the original founders of Matterley and prior to that worked at New Star Asset Management He is supported by assistant portfolio manager Jack Barrat In constructing the portfolio, the manager considers the economic environment in which companies operate in addition to the prospects for individual sectors and companies He aims to generate positive returns over the long-term through the identification of stocks that he believes will rise in value by at least 10-20% for the ensuing three years Moreover, he remains true to his philosophy even in the face of shorter-term adversity and this helps build conviction in his ability as he has a record of generating strong long-term returns, although investors should be prepared for relative performance variability over shorter-term periods The fund offers investors a valuation conscious approach which is actively managed and is biased to stocks lower down the market-cap scale The manager seeks to identify companies which are considered to be undervalued relative to their asset base and to the returns on capital the companies are generating The investment process has been applied consistently over time Old Mutual UK Alpha Invests in a portfolio of UK equities and aims to add value over the investment cycle through a concentrated, high-conviction portfolio invested primarily in large-cap companies In performance terms it aims to outperform the FTSE All-Share Index Richard Buxton joined Old Mutual Global Investors from Schroders in June 2013 He has however managed this fund since December 2009, having previously managed it as a segregated mandate on behalf of the group Buxton has applied the same process and philosophy for over ten years first at Schroders and this fund continues to be managed in the same fashion In August 2015 he was appointed CEO of OMGI Although the role does involve additional responsibilities and demands on his time, we take some comfort from the fact that he remains well supported by Errol Francis and Ed Meier, who also joined from Schroders Important Information FOR PROFESSIONAL CLIENT USE ONLY Morningstar Investment Management Europe Ltd is authorised and regulated by the Financial Conduct Authority and is the entity providing the advisory services noted within this material Morningstar s fund research and rating activities are not undertaken by Morningstar Investment Management Europe and as such, are not regulated by the Financial Conduct Authority 2016 Morningstar All Rights Reserved The information, data, analyses, and opinions contained herein (1) include the proprietary information of Morningstar Investment Management Europe, (2) may not be copied or redistributed, (3) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (4) are not warranted to be correct, complete, or accurate Morningstar Investment Management Europe shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use It is important to note that investments in securities involve risk and will not always be profitable Morningstar Investment Management Europe does not guarantee that negative returns can or will be avoided in any of its portfolios The Portfolios described are intended as a guide to fund mixes that could be considered when populating the asset allocation for a particular risk profile Past performance is no guarantee of future results The Morningstar Analyst Rating should not be used as the sole basis in evaluating a mutual fund Morningstar Analyst Ratings are based on Morningstar s current expectations about future events; therefore, in no way does Morningstar represent ratings as a guarantee nor should they be viewed by an investor as such Morningstar Analyst Ratings involve unknown risks and uncertainties which may cause Morningstar s expectations not to occur or to differ significantly from what we expected Morningstar Analyst Ratings are subject to change at any time and without warning Please see wwwmorningstarcouk for the latest Ratings