Iain McGowan on the Scottish Widows Family of Funds
An in-depth look at our core multi-asset pension funds with Scottish Widows’ Director of Investments
Q: What is Scottish Widows’ family of multi-asset pension funds?
This is something of an umbrella term to refer to the three related ranges of pension funds we offer 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?
The Pension Portfolio Funds form the basis of our multi-asset pension offering, including the Workplace “default” investment options. Each Pension Portfolio is made up of a number of passively managed ‘tracker’ funds, which themselves invest primarily in equities and bonds. We decide and review 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, in 2015 we launched our Premier Pension Portfolio Funds to meet demand for a range that provides a wider range of investments. That diversification within Premier offers potentially higher returns for the same level of risk as the equivalent Pension Portfolios. Finally, in February 2018 we launched the Retirement Portfolio Funds, which are 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 incorporated our Dynamic Volatility Management (DVM) process, which uses a unique algorithm, into all our Retirement Portfolios.
Q: Tell us about your approach to asset allocation.
We have a dedicated Asset Allocation Team with a great depth of experience and industry knowledge.
We set a long-term (or strategic) asset allocation for each of the Pension Portfolios, which is also carried across directly into the Retirement Portfolios, and review that about once a year. In these reviews, we are looking for opportunities to improve long-term returns (based on financial modelling), without increasing the risk profile of the Portfolios. We similarly review the strategic asset allocation of the Premier Portfolios, with a view to improving long-term returns.
Additionally, we are always alert to opportunities to include new asset classes in any of the Portfolios, if we believe they will contribute materially to long-term outcomes.
Q: 2020 has been a bit of a rollercoaster. How have the Scottish Widows multi-asset funds evolved to meet changing customer needs?
Our 2020 strategic asset allocation review resulted in some new developments this year. Within the Pension Portfolios and Retirement Portfolios, we’ve diversified the asset mix to include emerging market government debt, provided access to the property sector through Real Estate Investment Trusts, and committed to adding currency hedging on a portion of our overseas developed equities. In addition, we have integrated Environmental, Social, and Governance (ESG) considerations with the introduction of the BlackRock Climate Transition World Equity Fund, which you can find out more about here.
It was also an eventful year for Retirement Portfolio Funds (RPFs), which have the unique Dynamic Volatility Management (DVM) de-risking feature that has been triggered through a large portion of the year. DVM reduces the equity exposure of the RPFs during periods of market volatility, so we saw significant de-risking significantly in March when share values were heading sharply downwards. Given the speedy market recovery that happened, the lower exposure to equities has meant that the RPFs underperformed compared to the Pension Portfolio Funds at points in 2020. However, the funds and the DVM mechanism worked as intended.
Our Pension Portfolio Funds have continued to deliver returns that compare favourably against similar lowcost, passively managed multi-asset funds. The more diversified Premier Portfolio Funds favour a smart-beta “value investing” approach and thus had lower exposure to the mega-cap market leaders; however, by year end the value style of investing appeared to be rotating back into favour.
This challenging year has proven just how difficult it can be to predict what the future has in store and reinforced the benefits of diversification and a long-term approach.
Q: Can you tell us a bit more about your Responsible Investment framework?
Responsible Investing (RI) is an investment approach that acknowledges the relevance and financial impact of ESG factors, and of the long-term health and stability of investment markets as a whole. RI aims to reduce risk and improve investment returns for customers by creating long-term, sustainable environmental, social, and economic value through integrating ESG factors into investment analysis and decisions.
Alongside the launch of our Responsible Investment Framework we conducted a strategic review of material financial risks and opportunities linked to ESG issues, alongside the need to position the funds to benefit from new environment while maintaining the same levels of risk. We factored in how we could diversify the sources of return, while maintaining an appropriate level of equity investment. Find out more about our Responsible Investment and Stewardship Framework here.
Q: With the evolution of the funds during 2020 will you maintain the quoted Total Annual Management Charge for each of the ranges?
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?
Not in the short term. Our portfolios are available only through Scottish Widows pension wrappers for now.