Do not believe the hype. While a firm may decide to outsource investment because it has decided another business is better resourced to provide the engine room for clients’ portfolios, it may very well reserve the right to have a final say on where money goes.
This is exactly what Bridgend-based Magenta Financial Planning has done. While it has handed ‘core’ portfolio construction to discretionary fund managers (DFMs), primarily Seven Investment Management (7IM), Magenta’s advisers still have a hand on the asset allocation tiller.
Magenta is not a big firm by any standard. It has seven staff in total, of which two are advisers. But it has pooled resources with neighbouring IFA Broadway Financial Planning to assemble an investment committee.
Magenta managing director Gretchen Betts meets with her paraplanner; Broadway managing director Keri Carter; and her paraplanner, at least every six months to discuss tools, risk profiling, research, due diligence on managers and asset allocation.
The right fit
Take the 7IM portfolios, for example. Magenta’s investment committee will pick and choose which elements of the portfolios it wants to adopt. But the investment committee’s ability to alter the asset allocation of a DFM depends on the relationship it has with the manager.
‘For certain risk profiles [7IM] might be fine but we don’t just take that as a given,’ says Betts. ‘Because our core portfolio goes to 7IM at the moment, it has a strategic asset allocation it publishes and we have to decide whether its strategy for each risk group is what we want.
Magenta uses FinaMetrica for risk profiling its clients. She says she can use FinaMetrica to identify especially volatile stocks ‘that someone in a certain risk category would be able to tolerate’.
‘So we tend to check that whatever the DFM is using in its asset allocation fits into the FinaMetrica guidelines for that risk profile.’
Engaging with investment in this way also keeps staff up to speed. Clients still want answers from their financial planners, even when the firm is outsourcing.
‘Clearly with market turbulence, and economic stresses during this ongoing Brexit drama, we get questions from clients. We have to know what we’re talking about,’ says Betts. ‘So while we outsource I don’t just think: “Oh well, I don’t need to know anything”.’
New world order
Magenta offers access to ethical investments for clients who want them. This is where it departs from the 7IM core, preferring more specialised DFMs such as Rathbone Greenbank and EQ Investors.
‘I’ve always used ethical portfolios,’ says Betts. She can even claim kudos for the fact a client that started investing ethically at her first firm, Clay Shaw Thomas, where Betts worked as an IFA and paraplanner from 2003 to 2012, has stayed with her until today.
‘But I have seen more of an uptake in ethical recently,’ she says. ‘I just think our world is changing. People’s attitudes are changing, young people in particular, so investment has to change.’
Ethical and impact investment options run alongside 7IM’s core asset allocation and now represent at least 20% of its client investments.
A favourite fund of the firm’s in the ethical space (considering most funds in the 7IM portfolios are index trackers), is the Polar Capital Biotechnology fund. This is held in the EQ Investors’ portfolios.
Managed by Citywire AAA-rated David Pinniger, this fund is ranked first out of nine in the Citywire Biotechnology sector over three years, returning 32.9% to 31 December 2018, compared with the average manager’s 4.4%.
Polar Capital Biotechnology has done an excellent job for many years and delivered outstanding returns. However, biotechnology is around as punchy as equity investments get and is twice as volatile as the broad global health care index.
It fell by 18.5% in the fourth quarter of 2018, compared with a 7.2% decline in healthcare stocks.
Betts highlights the fund’s holding in Biogen, at 3.5%, a company focused on neuroscience. It develops new treatments into multiple sclerosis and dementia research; and works towards the good health and wellbeing sustainable development goals set out by the United Nations.
‘Biotechnology funds have developed significantly in the past 10 years, investing in themselves and research and development, rather than selling themselves to larger pharmaceuticals,’ Betts says. ‘They are at the forefront of new technology and development, and are improving quality of life and life expectancy for some of these awful diseases.’
Incidentally, Magenta is also signed up to an Alzheimer’s Society initiative called Dementia Friends, through which staff get training and information on helping people affected by the disease.
Real life impacts
When it comes to investigating whether clients have any interest in ethical investment, Betts says the UN Sustainable Development Goals have ‘blown the conversation wide open’. The goals were set by the UN in 2015 and each one relates to advancing a different objective, such as achieving gender equality, making cities sustainable or ending poverty.
Different environmental, social and governance funds aim towards supporting different goals.
‘Conversations used to focus on the negatives of investing ethically, but now it is about impact,’ says Betts. ‘Yes, you can still screen out certain criteria with a specialist DFM. If you’re adamant you don’t want any palm oil near your portfolio, you can.
‘If you’re looking at broadening your business proposition to try to bring in younger investors, thinking about the fact you’ve got an ageing client bank, I’m pretty sure everyone is going to say “well if I can have ethical, I will have it”.
‘I don’t know if every adviser asks their clients about ethical investing because there is no way someone has no sustainability-minded people in their client bank. But the way you phrase it is really important.’
Having a small impact in one’s day-to-day life helps frame the discussion about impact investing, Betts says. ‘For example, EQ Investors has an impact calculator on its website so you can see the impact of your money that’s in a fund, such as how much water you have saved.
‘This gets people more engaged with their money, with their life, with everything.’