Efficient Style Frontier
Three industry experts sat down with Confluence to discuss the Efficient Style Frontier -how technology and industry expertise can help balance growth and value factors for optimal risk-adjusted returns.
On the agenda were:
- Evaluating real stock-picking skills, separate from market trends
- Efficient Implementation – ETFs vs active vs own nothing
- Setting style allocations across varying markets / cycles
The panel included Style Analytics clients from three very different firms. While each described a unique perspective and approach, one consistency was a deep awareness of the ever-increasing focus on cost minimization.
Chris Smith-Hill, Confluence’s Head of Product for Style Analytics, started by asking each panelist to describe their firm’s macro approach.
Jaisal Pastakia, CFA Chartered FCSI, Investment Director
Handelsbanken Wealth & Asset Management
“Handelsbanken are specialists in multi-asset class investing. We take a top-down approach to portfolio construction. This means we consider where we are in the business cycle, which in turn drives decision making on how to allocate across different asset classes,” said Jaisal.
“Currently we are finding that our key indicators are between what we think of as the “recession” phase and the “early cycle” phase. In terms of asset allocation we are subsequently neutral equities, with an overweight towards quality and defensive sectors; overweight bonds and bond duration, principally via UK Gilts; elsewhere we hold gold for downside protection.”
Anusha Krishnan, Senior Fund Analyst
SG Kleinwort Hambros Bank Limited
“Our investment philosophy has three guiding principles,” said Anusha, “the first being getting the big decisions right by dynamically adjusting our allocations to different asset classes and geographies.” The goal of dynamic adjusting, and active management is to make us all-weather – able to withstand any market stress. As an example, the recent political upheaval in France did not affect us – we had enough downside protection.
Hargreaves Lansdown
“We have started using a TAA overlay within some funds. We don’t take explicit macro bets at Hargreaves Lansdown,” said Lee. “Or try to time the market, or go under- or overweight. Our clients are retail, our primary reason for using Style Analytics is to make sure we’re close to style-neutral – that we don’t fluctuate too far from the benchmark. For us, stock selection comes by selecting underlying fund managers with a history of generating alpha. And because we hire fund managers, not fund houses, we’re more nimble.”
I’m hearing three different perspectives on economic impact into fund selection. Now let’s dive a little deeper into the way your firms look at equities in terms of regional sector and style bets.
While we’re not explicitly taking a size bet, with our overweight stance we’re invariably investing in the Large-cap quality growth space. Right now, we still believe that momentum and sentiment are pointing in the right direction.
How do you build an equity portfolio within a multi-asset class portfolio? We’ve gone through a deep evolution on that one. We now think Style is a much more powerful driver of equity returns than country or regional selection.
A few years ago, in collaboration with Damian Handzy and James Monroe’s team at Confluence, we developed the cycle-based approach you see here. Now it’s our starting point.
Lee, over to you. Aside from strategically blending the best stock pickers you can find to generate Alpha, what other approaches do you pull in to achieve that value and growth Efficient Frontier?
There’s been a big push from the FCA in terms of pushing costs down. A key thing today for us is to find Fund managers willing to switch to a segregated mandate. Costs go down, value goes up.
Costs have become a very a big part of the conversation. Any active manager we bring to the table today has to show demonstrable value not just in terms of current positioning, but in a consistent value-add over time.
There are certainly areas where we outrightly prefer to go with an ETF. We track the percentage of active managers consistently beating the benchmark and It’s hard for active managers to really add value in some areas, particularly the US. Whereas, we’ve found Japan is a rich ground for active management players. Essentially, we choose where we want to be active. It’s not just about the right instrument, it’s about choosing an instrument that’s consistently justifying the cost at which it’s in the portfolio.
As a business we have metaphorically held the mirror up and challenged our approach towards instrument selection. Over the last year we have carefully analysed which our active manager selections have really added value over the long run versus passive equivalents. The result of this has meant we reduced our exposure to active managers and gone down more the passive route. To put some numbers to this, if you looked at the equity book of our flagship Balanced multi-asset fund five years ago you would see 24 holdings – 9 of these were ETFs and 15 were active managers across different regions and sectors. Today we have consolidated to 13 holdings – 12 ETFs and only one active manager.
So would you say you’re taking an active bet on passive, at the allocation level?
Once you decide to underweight or overweight particular style bets, or underweight or overweight particular sectors or geographies, guess what? You are the active manager! So yes, we’re implementing active views via the passive route. And costs are one-third of what they were 14 months ago.
I know you use Style Analytics to help with your weighting and positioning – can you tell me about that?
Style Analytics is central to our equity process. For us, Style Analytics acts as both a compass and a thermometer – in terms of the style bets we take and the magnitude of these bets. Given that style is central to our process, Style Analytics is essential to how we build equity portfolios.
Compared to a year ago, our portfolios are much more transparent, are much more liquid, and the underlying costs are 2/3 lower.
You’ve also told me Style Analytics shines a light, gets to the heart of what a fund really is?
I could have two instruments in front of me and the names could be totally different but with Style Analytics I’ll see that they both have big growth tilts and big small cap tilts – meaning that while they have very different names, they could behave similar under certain market conditions. So it helps with portfolio construction as well.
It’s invaluable in highlighting and fleshing out a manager’s biases. To drill into how outperformance has actually been achieved.
I can second that. It bridges the gap between what we’re told, versus what’s actually within the portfolio. We can see whether their stated philosophy actually matches the underlying exposure. And what kind of unintended risks are taken. You can see what is going on, from the bottom up, and avoid the managers who are just riding a tailwind. Style Analytics allows you to go in depth into holdings-based analysis.
Conclusion
The panel discussion underscored the importance of leveraging technology like Style Analytics to enhance portfolio construction, transparency, and cost efficiency. Each firm demonstrated unique approaches to balancing growth and value factors, driven by a shared goal of optimizing risk-adjusted returns. The consensus on the need for cost-effective strategies, alongside the selective use of active and passive management, highlights a nuanced approach to navigating modern investment landscapes.
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