SCOTTISH WIDOWS FAMILY OF FUNDS
An indepth look at our fund range with Iain McGowan, Head of Fund Proposition, Scottish Widows Investment Strategy & Execution.
Q: What is the Scottish Widows ‘family of funds?’
A: Our family of funds refers to our three core ranges of pension funds, which are available to individual pension customers (through our Retirement Account proposition) and to those in workplace pension schemes. They are:
1. Our Pension Portfolio Funds (which are available individually as well as forming the building blocks of our Governed Investment Strategies (GIS) for individual pension customers and our Pension Investment Approaches (PIA) for workplace schemes)
2. Our Premier Pension Portfolio Funds (which similarly are available individually, but also form the building blocks for Premier GIS and Premier PIA)
3. Our Retirement Portfolio Funds.
Q: What are the differences between these three ranges and how do they meet your customers’ needs?
A: Our Pension Portfolio Funds are our original, most simple, pension fund range. Each Pension Portfolio is made up of a number of passively managed ‘tracker’ funds, which themselves invest in equities and bonds. We decide the ‘split’ between these funds, meaning that the Pension Portfolio range combines the benefits of low-cost passive investing with our own asset allocation decisions.
While the Pension Portfolios have been, and will continue to be a vital part of our offering, just over three years ago we launched our Premier Pension Portfolio Funds, to meet demand for a range that offers potentially higher returns. The key difference between Premier and our original range is the number of different types of investments in which Premier invests. While one might assume that the Premier range is therefore more risky, this actually isn’t the case. We target similar levels of risk within both ranges – which is possible because the added diversification within Premier reduces risk.
Finally, last year we launched the Retirement Portfolio Funds, which again are multi-asset, and specifically designed to meet the needs of customers taking income drawdown during retirement. We undertook considerable research into the impact of market downturns on a pension pot during retirement and how this could be mitigated. As a result, we designed our Dynamic Volatility Management (DVM) process, which we believe is unique, and incorporated into all our Retirement Portfolios.
Q: You mentioned that the Pension Portfolio Funds are invested solely in equities and bonds. Would you consider the inclusion of other asset classes, such as commercial property and infrastructure, within these Portfolios?
A: Alternative asset classes such as commercial property and infrastructure offer attractions, particularly in terms of diversification. The reality is though, that they are more expensive to invest in than equities and bonds and therefore do not fit within the price of our Pension Portfolios.
These portfolios are designed to be simple and low-cost, and they appeal to many investors for that reason. However, we do believe that choice is very important and that is why we also offer our Premier Pension Portfolios. These portfolios include several types of alternative investments – though as a result they are also more expensive.
Q: The Premier Pension Portfolios hold a significant proportion of their equity weighting in ‘smart beta’ strategies. Why did you decide to include these over traditional market-cap-weighted passive solutions?
A: Market-cap-weighted passive funds present a simple and effective means of giving exposure to equity markets and, as such, they play an important part in our Pension Portfolio Funds. We see advantages though, to alternative forms of index tracking, in terms of medium-to long- term performance prospects. The ‘smart beta’ indices that we use within the Premier Portfolios have been built based on the fundamental value of the underlying companies – the belief is that this provides a better indication of a company’s prospects than market capitalisation. ‘Smart beta’ strategies are more expensive to invest in than market-cap funds, but we are able to absorb this extra cost within Premier.
Q: If the Retirement Portfolio Funds are effectively an evolution of the Pension Portfolios, did you also consider a retirement version of the Premier Portfolios?
A: Yes, we did consider a retirement version of the Premier Portfolios and, indeed, may return to this in the future. However, as the Premier Portfolios hold a wider array of asset classes, they have a lower exposure to equity markets – as such, equity market protection would have a lesser effect in Premier.
Q: You said that you undertake your own asset allocation decisions – please could you explain which team is responsible for this, and do they express their views across all three of the fund ranges?
A: We have a dedicated Asset Allocation Team that is responsible for asset allocation decisions. It is run by Gavin Stewart, who has a great depth of experience and who has held a number of senior roles within the industry.
If we start with the Pension Portfolios: we have set a long-term (or strategic) asset allocation that recognises the part each portfolio might play in a de-risking strategy, or glidepath. We review that strategic asset allocation on a regular basis, typically annually, looking for opportunities to improve long-term returns (based on financial modelling), without increasing the risk profile of the portfolios. This strategic asset allocation is also carried across into the Retirement Portfolios as a matter of course.
Our aim within the Premier Portfolios is to provide higher returns over the medium term for the same level of risk as the Pension Portfolios. This involves reviewing the components of the Premier Portfolios as the strategic asset allocation of the Pension Portfolios changes. Additionally, we are always alert to opportunities to include new asset classes within Premier.
Our Asset Allocation Team also considers expected asset class performance over the medium term (three to five years) and based on that, they will decide whether to overweight or underweight certain positions for a period of time. The opportunity to do this is greater within the Premier Portfolios simply because they have a high number of asset classes.
Q: What impact will the change of your strategic asset management partner have on the management of your range of portfolios?
A: There will be no change to the design of our portfolios or to the overall style of management as a result of changing asset management partner. Where elements of a portfolio have been managed by Aberdeen Standard Investments, the management of those elements will move to BlackRock for passive management and Schroders for active management. There will be no change to the underlying funds that we use within our portfolios, other than the replacement of those from Aberdeen Standard Investments.
Q: How have the Premier Portfolio Funds performed since they were launched and what are you forecasting for the next three years?
A: The Premier Portfolios have produced strong absolute returns since launch. The two with the highest equity content outperformed their Pension Portfolio equivalents over the period, though by a relatively small amount, mainly through the performance of the ‘smart beta’ components. The portfolios with a lower equity component underperformed their Pension Portfolio equivalent as the alternative asset classes in which they invest failed to keep pace with the rest of the market.
It’s worth noting that the Premier Portfolios outperformed their equivalent Pension Portfolio in 2018, in challenging investment markets and where diversification proved important. In general, they underperformed strongly rising equity markets in 2016 and 2017, when the higher equity content of the Pension Portfolios drove returns.
This is broadly what we might have expected in these market conditions.
Q: Your whole family of funds appear to be very competitively priced. How committed are you to maintaining the quoted Total Annual Management Charge for each of the ranges?
A: It is important to us that these ranges are competitively priced. This is reflected in the annual management charge, which also includes other expenses within a portfolio, often known as the Ongoing Charges Figure, or OCF.
We have achieved this pricing through our careful selection of asset classes and underlying funds, and by sourcing the underlying funds on competitive terms. We are committed to continuing to apply these disciplines and reflecting them in our price to customers.
Q: Do you anticipate making your portfolios available via third-party platforms?
A: Not in the short term. Our portfolios are available only through Scottish Widows pension wrappers for now.