Our investment expertise

• Our long-standing track record in managing investments on behalf of our customers and your clients, including the UK’s largest and longest-running workplace pension default investment proposition.
• Our size and scale. Scottish Widows has over £200bn of assets under management, with over £100bn in multi-asset strategies, and we look after the investments and savings of over 6 million customers. Managing large sums on behalf of customers, allows us to keep costs low and deliver value.
• Our investment independence. We’re not tied to an in-house investment manager so are able to select best-in-class investment managers for different asset classes.
• Our ability to leverage capabilities from the wider Lloyds Banking Group, such as its expertise across UK-based private markets opportunities, including private equity, social housing and private credit.
   

Our Asset Allocation team is responsible for setting the Strategic Asset Allocation across Scottish Widows’ multi-asset solutions and other investment products. The experienced team continuously develops and refines our approach to ensure optimal investment strategies, while also undertaking topical thought-leadership and asset allocation research. Members of the team have a broad range of experience in asset allocation and financial markets, with each selected for their unique set of skills and knowledge.

Our Strategic Asset Allocation (SAA) reviews assess and optimise our funds, typically on an annual cycle, or more frequently if market conditions change sufficiently. The process is designed to be dynamic, so it’s reviewed when there’s a large market move that could influence our assumptions and expectations.

SAA represents our long-term view of returns and risks by applying a baseline target allocation across all the different risk profiles of our multi-asset funds. We use market-traded instruments and economic forecasts to help inform our market expectations.

We use historic market data as a starting point for setting our SAA but are acutely aware that asset classes evolve over time (e.g. market size, sector make-up) and also use forward-looking tools to understand our factor risk exposures to ensure we don’t have any unintended biases to any market factor. We’re conscious that relying wholly on the output of a model, without validation or awareness of positioning, can lead to unexpected performance outcomes, so we internally challenge our outputs and compare them to external forecasts.

For more details, please see our guide: Our approach to asset allocation.

Tactical Asset Allocation (TAA) aims to add to performance by taking advantage of short-term news and potential market opportunities such as perceived mispricing or sector momentum. For our workplace investment proposition and our core multi-asset funds, we don’t make short-term TAA calls based on sentiment. We do, however, have a dynamic strategic asset allocation strategy which evolves portfolios as future expected returns and risks change.

We don’t have a trading desk but allow certain appointed investment managers, for example, in the Premier Pension Portfolio Funds, some leeway to undertake TAA to tilt portfolios, including adjusting regional equity mixes. This is done by them with a broadly 3- to 12-month view. It aims to reduce exposure to protect portfolios when they see risks emerging or to add value by tilting the overall SAA.

Diversification is the most important asset allocation decision in our view, with portfolios split between growth and defensive assets.

We believe equities have a strong role to play in generating returns for long-term investors and should form the cornerstone of the growth assets within multi-asset portfolios, because growth assets tend to outperform other major asset classes over the long term.

We believe in the benefits of having a mix of investment styles and factors across our equity portfolios. The overall extent to which equities are used within our multi-asset portfolios depends on the risk profile of the specific fund.

We also believe Emerging Market equities should form part of our overall equity allocation. Emerging markets equities can have a high return potential due to both structural dynamics, such as a growing middle class and rising share of global gross domestic product. But, because of the nature of less-developed equity markets, investors require a higher risk premium for investing here.

We believe that bonds are a key asset class within our multi-asset funds, given their lower volatility profile and typically low correlation to equities.

We favour diversification within our bond allocations – investing in different areas of the fixed income market, including different geographies. Typically, we invest in government and investment grade corporate bonds in, for example, the UK, developed markets and emerging markets.

We believe allocating to a more diverse range of asset classes, which can generate returns with low correlation to equity markets, can help multi asset funds take advantage of wider market opportunities and diversify overall risk exposures.

When assessing the use of new asset classes, including alternatives like private market investments, key considerations include customer needs, the cost of accessing these assets, tax considerations, correlations with existing portfolio assets, liquidity, mandate constraints, and market capacity, given the size of our assets under management.

We believe private market investments can provide diversification and access to attractive longer-term growth opportunities.

Private market investments encompass a range of asset types distinct from traditional public markets, including private equity, venture capital, infrastructure, private credit, real estate, and natural capital. They deliver different investment return streams with different characteristics that can be particularly useful in enhancing workplace pension member outcomes throughout the retirement journey. They can support innovative start-up or growth businesses to scale or access real assets, giving investors exposure to new return streams not found on listed markets.

Private market investments can also offer strong environmental, social and governance (ESG) benefits by enabling direct influence over portfolio companies. Investors may drive sustainability practices, improve governance and promote social impact initiatives more effectively than in public markets. Value creation over the longer term is supported through active ownership, alignment with ESG goals and funding of innovative, purpose-driven businesses. For example, they can support businesses that are solving real-world problems like clean energy, affordable housing or better healthcare.

Initially, we’ll be investing in private markets in our new workplace pension default solution, Scottish Widows Lifetime Investment. We’re reviewing how to incorporate private market investments in other propositions.

The Implementation & Portfolio Management function selects and manages the core mandated funds. They choose funds that meet the requirements of the long-term core allocations set by the Asset Allocation team.

They use a rigorous, transparent, and scalable process to research and select managers. The process incorporates five stages:

• Stage 1 – Market screening & shortlisting
• Stage 2 – Request for Proposal process to score prospective funds and their managers, assessing their Philosophy, Process, People, Portfolio and Performance – this is our ‘5P’ framework.
• Stage 3 – Pitches & Scoring
• Stage 4 – Calibration & appointment.
• Stage 5 – Implementation & onboarding.

For full details see our portfolio management guide (PDF, 2MB)
 

Making changes within a portfolio results in a trade-off between costs and performance. Rather than imposing constraints on portfolio turnover, we ensure trading costs are incorporated into our overall decision-making.

Limiting annual turnover of assets can lead to sub-optimal portfolios, with lower returns and higher risks. We calculate expected ongoing costs for asset classes into our Capital Market Assumptions (CMAs) process, including expected transaction costs to ensure that the impact is offset by the risk adjusted return benefits, when measured over the recommended time horizon. CMAs are our own expected return forecasts for a broad range of asset classes

Our minimum allocation to any asset class will be set at 3% where possible. This ensures that we don’t end up with an allocation that is operationally complex, inefficient, and more expensive. We generally expect each fund to allocate to between 5 and 20 different asset classes.

Our Capital Market Assumptions (CMAs) are our own expected return forecasts for a broad range of asset classes. We carry out this process in-house rather than relying on an external provider, allowing us to include the expectations and analysis of our asset allocation experts.

We believe an outsourced model constrains our ability to offer consistent outcomes across our range of propositions, so recently brought CMAs in-house. While we produce CMAs internally, as a sense check, we validate our forecasts against external estimates.
 

Overarching both our asset allocation and portfolio management processes are a wide range of robust governance and control mechanisms. These include committee or board oversight, regular reviews of our CMAs, SAAs and fund ratings changes.

We believe environmental, social and governance (ESG) factors can be financially material and impact corporate profitability and, therefore, investment portfolios. So responsible investing is fitted as standard in our investment propositions, which means we consider the risks and opportunities related to ESG factors to help deliver good customer outcomes.

To achieve this, we seek to develop resilient investment portfolios which offer both downside protection by reducing exposure to certain ESG risks like ‘stranded assets’, and upside potential to capitalise on growth and profit opportunities. All while shaping a better world to retire into. We do this through our exclusions policy and tilting towards companies with better ESG credentials or those taking credible action to transition their businesses to a low carbon economy – and away from those that aren’t.

We exercise our shareholder rights to encourage companies to plan and evolve their activities responsibly through engagement and voting activity. And we engage with wider industry, policymakers and investment managers, using our scale and influence to help address systemic interconnected social and environmental risks which impact whole economies, companies, society, financial markets and, ultimately, our investment portfolios. Addressing these risks helps shape a more resilient, sustainable world and safeguard the long-term interests of customers.

• We invest in a diverse range of asset classes across regions, economic sectors and industries. We play an active role to effect system-wide, real-world change. Our Stewardship Policy, and Responsible Investment and Stewardship Report set out our approach in detail
• We exclude companies which fail to meet minimum criteria and/or invest in activities that we believe pose undesirable investment risks. Details can be found in our Exclusions Policy.
• We employ ESG tilts focused on priority themes for some index-tracking strategies. Tilting means applying a higher weight to companies with stronger ESG credentials compared to the benchmark.
• We apply a holistic approach to reducing the carbon footprint of our investments to net zero carbon emissions by 2050, focused on a just, low carbon transition that is inclusive and connects climate, nature and social considerations. This includes halving our carbon footprint from a 2019 benchmark by 2030 and investing in climate solutions.
• When setting the Strategic Asset Allocation for our funds, we use long-term asset class forecasts and consider the impact of global trends such as climate change, for example through our climate scenario analysis.