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Interview: Running an in-house DFM service

Charlotte Watson, chief investment officer Attivo Investment, was brought in to design and develop the in-house investment proposition for the Attivo Group (DFM and model portfolios). ABR editor Rob Kingsbury asked her about the structure of the proposition, the research and investment approach, the use of  actively managed and passive investments and her concerns around the markets

Rob Kingsbury: What is the structure of the investment team?

Charlotte Watson: Our investment team consists of six people, the chief investment officer, investment manager, investment analyst, investment operations manager and two investment administrators. In addition to our day-to-day activities, we have weekly equity meetings between the CIO, investment manager and the investment analyst and monthly investment committee meeting when we are joined by Stephen Harper, the Attivo group chief executive.

RK: What is your investment approach?
CW: Attivo Investment firmly believes in long term investing using a wide range of assets dependent on the client’s circumstances, objectives and investment experience. Our clients are individuals, families, trusts and charities and come from a wide variety of backgrounds.

We believe in ‘time in the market’ rather than ‘timing the market’. In this respect we are less concerned with short-term price movements and focused more on longer term trends and themes. We believe long term returns can be achieved through in-depth analysis of assets and their macroeconomic environment. Our bespoke portfolios cover a range of strategies, including thematic, value, growth, income and total return again depending on the client.

RK: How do you manage the DFM operation?

CW: The investment team has a range of tools at their disposal for research such as Bloomberg and FE (Financial Express), which allow access to an unparalleled amount of information about markets, industries, stocks and funds. In addition to being able to purchase thousands of different onshore and offshore funds, the investment team can access securities across 30 international stock exchanges via its trading platform provided by Pershing Securities. Our portfolios use many well-known investment names such as Schroder’s, Invesco Perpetual, Baillie Gifford and JP Morgan but also niche investment funds from Skagen, Polar Capital and Matthews Asia.

We produce monthly factsheets containing a market and portfolio update, which are sent to clients invested in managed portfolios. The financial advisers offer each client an annual review to re-examine their objectives and risk. Clients who have bespoke portfolios have a separate investment review conducted by the investment team in addition to any financial planning reviews. As the investment team is based in the same office as the financial advisers they are able to get a feel for current market events very quickly and communicate this to their clients.

Attivo Group – Structure of the DFM operation

Attivo Investment DFM structure

RK: How do you ascertain attitude to risk?
CW: Managed portfolios are created with specific risks and objectives in mind. Financial advisers assess the client’s risk, objective and time horizon and recommend a suitable portfolio depending on their previous investment experience and knowledge. Advisers can also request a bespoke proposal if required. The model portfolios have volatility parameters for each risk profile, a target asset allocation and on a monthly basis undergo various stress tests.

RK: You offer whole-of-market investment. How do you research the market and filter the funds for the managed portfolios?
CW: We use a range of tools to narrow down the investment universe either for our managed or bespoke portfolios. Whilst there are some basic metrics such as fund size that we use as a starting point, the actual metrics used can vary depending on the type of fund and where we plan to use it in the portfolios.

We conduct due diligence on the fund, the management team and if necessary the parent group. We consider the background of the team, the ideas generation and decision-making process. We will usually conduct a conference call and/or a face-to-face meeting with the management team to cover any points needing clarification. Once this is complete a recommendation is made to the Investment Committee as to where the fund may be used. Once a fund is agreed we request regular reports from the manager so the performance data we collect from various sources is backed up by narrative about how their decisions have performed.

RK: How do the bespoke portfolios work for clients?
CW: Bespoke portfolios by their nature vary considerably. We run everything from simple ethical/socially responsible mandates to ‘best ideas’ direct international equity portfolios for more experienced or professional clients. The client will provide a bespoke requirement mandate which will cover in detail the markets, currencies, asset classes, geographical areas they do/do not want to invest in, along with risk and experience levels.

RK: You seem to use actively managed funds rather than passives? Do you believe they perform better for clients?
CW: We look for value for money so if we can achieve the same outcome but for less cost we will do that. In certain market conditions, particularly in a bull market, it can be difficult for active managers to beat their respective benchmarks, in fact we saw some evidence of this last year in certain markets. Last year our portfolios did include a number of passives in both equity and fixed interest positions. We do currently retain some exposure to passive funds, but not as much as last year. In an environment where the market is now focusing on a gradual tightening of policy (including a future rise in interest rates) having an active fund, particularly in the fixed interest space, at least gives the potential to minimise capital losses when bond yields rise.

RK: What are your concerns around the markets over the next few years?
CW: Our main concern is the number of low risk options open to more conservative clients. Traditional lower risk assets such as gilts and investment grade corporate bonds are producing record low yields. When the global economy begins to normalise and policy begins to be tightened we could see yields on bonds fall back to their longer term averages, which could mean capital losses for investors still holding those bonds. Unfortunately, we do not have a crystal ball that gives us the date that this will happen. Also, the world is at various stages of recovery, the US is leading followed by the UK. Core Europe is behind the UK but peripheral Europe has a long way to go. Even in emerging markets different countries are moving at different speeds.

RK: What’s the advantage of an in-house investment team?

CW: Having an in-house investment team means that the culture of the firm is aligned and represented in each division of the business providing continuity and consistency rather than outsourcing to a firm, which may not have the same values. Our investment proposition was designed and launched taking into account the clients we had and, therefore, is not a one solution fits all – the proposition works over several tiers taking into account investment size, experience and ongoing contribution levels.

Clients have access to our investment team and financial advisers at all times, and contact via our Client Services team enables a quick and efficient response to queries. In a structural sense, clients benefit from only having one place to log in to receive their valuations, and marketing and factsheets are all branded consistently.

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