Portfolio Adviser • Portfolio Adviser February 2019 v2 • High Allocations To In-house Funds Raising Eyebrows

● Large in-house allocations to SLI’s Global Absolute Return Strategies portfolio have prompted debate

● Some believe companies within vertically integrated firms may not be selecting the best funds for end clients

What’s the story? Chunky weightings of Standard Life Investment’s (SLI) Global Absolute Return Strategies (Gars) in its advice arm’s multi-asset portfolios have raised concerns about the allocations some vertically- integrated firms have to their own in-house funds.

Despite lacklustre performance for several years, Gars remains a mainstay of the managed portfolios sold by SLI’s parent company advice arm, 1825.

SLI’s absolute return behemoth features in all five portfolios in the 1825 MPS range, according to the adviser’s website.

A Q3 factsheet for the highest- risk mandate in the range, Portfolio 5, shows Gars as the third-largest holding at 7.76%. The lowest-risk mandate, Portfolio 1, holds a 2.28% position in the beleaguered fund.

A spokesperson for 1825 said the model portfolios invest across 21 different asset classes “to provide a high level of diversification”. Adding that Gars is one of three absolute return funds in the model portfolios.

“We have a higher exposure to absolute return funds as we move up the risk spectrum to Portfolio 5, as our view is that these funds represent growth assets over the long term, while potentially offering a reduced level of volatility.”

PA viewpoint Gars’ persistent presence across the 1825 range raises questions about whether restricted advice firms within vertically integrated companies are selecting the best funds for the end client.

None of the advisers PA spoke to have Gars or any absolute return fund on their buy lists.

What the industry thinks “I fail to see why anybody would use it, or why anybody ever used it,” said Red Circle Financial Planning director Darren Cooke about the £12.6bn fund. “It was always smoke and mirrors.”

“I’ve been around these types of funds long enough to know that you can generate shortterm performance but it doesn’t last in the long-term,” he said.

“If you generate the shortterm performance, I suspect there’s a lot more luck than judgement involved in doing it.”

However, Peter Sleep, senior portfolio manager at 7IM, said multi-asset strategies will have some allocation to absolute return funds and that a holding between 6% and 10% “sounds about right”.

“You need to strike a balance between concentrating on a few funds and over diversifying,” Sleep said. “Seven to eight per cent sounds like quite a punchy allocation, but it is in the higher- risk portfolios.”

Lang Cat consulting director Mike Barrett noted that the 1825 portfolios do contain fewer in-house funds than similar products from other restricted advisers that belong to vertically integrated firms.

7.76%

2.28%

-3.4%

3.3%

REGULATORY ROUND UP

● The Financial Conduct Authority (FCA) should step up to enforce changes to the UK Stewardship Code, which deems ESG factors financially material in a draft consultation published by the Financial Reporting Council. All signatories to the code will be required to take ESG issues into account under the proposed changes, which are open to feedback until 27 March. They would also be required to publish reports on their engagement with holding companies.

● A Financial Conduct Authority proposal to prevent up to 100,000 consumers each year losing out on future pension income when they access their savings has been met with a mixed response. Since the pension freedoms were introduced in 2015, the amount withdrawn from pension pots hit its lowest level in Q4 2018. Despite this, the regulator is concerned about the number of consumers moving into the drawdown phase and seeing their savings put into unsuitable investments.

● Gina Miller has called on Financial Conduct Authority boss Andrew Bailey (pictured) to resign if he is not willing to enforce Mifid II fees disclosure regulation. Miller, co-founder of wealth manager SCM Direct, said the FCA is failing in its statutory strategic objective to ensure markets function well. Bailey told MPs at a Treasury Select Committee hearing in January the UK regulator is yet to take enforcement action against any investment firm over Mifid II breaches.