Launched in 2010, the MyFolio range marked the entry of Standard Life Investments (now Aberdeen Standard Investments) into volatility managed fund products. ‘We weren’t the first in this space,’ said Bambos Hambi, head of fund of funds at Aberdeen Standard, ‘but we were early.’
Pre-launch, Standard Life conducted extensive research with financial advisers and customers. ‘The clear message was advisers faced difficulties deciding where to invest, as there’s a proliferation of choice at the fund level and a wide range of asset classes,’ said Hambi.
Standard Life responded by creating a fund of funds range that was easy to understand. ‘People like simplicity,’ Hambi added. ‘An adviser can explain the funds to clients easily, so it’s very popular.’
And the range has proved popular indeed. At 31 December 2017, MyFolio held a whopping £13.4 billion of assets under management across its 25 funds.
Why so popular?
Graham Bentley, managing director of investment marketing consultancy gbi2, who also sits on the investment committee for Distribution Technology, says this is in no small part due to a strong marketing drive from Aberdeen Standard.
‘They have hundreds of consultants banging on financial advisers’ doors and greater penetration than a small fund manager with a couple of sales guys,’ he said.
Another key driver of this success is that advisers are less inclined to make asset allocation and fund selection decisions. A recent report from CWC Research and The Lang Cat showed that, in 2017, 79% of advisers never made asset allocation decisions; the figure in 2008 was 10%. Similarly, 61% of advisers in 2017 never made fund selection decisions, up from 10% in 2008.
Other drivers are the benefits volatility-managed fund ranges offer financial advisers. First, as Bentley says, client risk profiles can be translated into a volatility target. ‘Other fund ranges might say they’re designed to be cautious, balanced, aggressive, psychopathic or whatever,’ said Bentley, ‘but that doesn’t necessarily mean the volatility itself is being managed to a target.’
Second, advisers previously had to get client approval to make changes to funds in client portfolios. But Bentley points out a risk-rated multi-asset fund ‘is a fund that acts like a portfolio’. This means the fund manager can make changes to underlying funds without needing client approval.
Third, changes made inside the multi-asset fund are not liable for capital gains tax. This contrasts with individual funds held inside an unwrapped portfolio.
How MyFolio is made up
The MyFolio range comprises five risk levels, running from one (I) to five (V). I typically provides the lowest returns at the lowest risk; and V provides the highest potential returns at the highest risk. The five levels are applied to each of the following five branded categories, giving 25 funds in all.
- Market funds, which mainly invest in passive funds and are the lowest cost MyFolio option.
- Managed funds, which mainly invest in Aberdeen Standard’s own active funds.
- Multi-Manager funds, which invest in active funds from across the marketplace and are the highest cost MyFolio option.
- Managed income funds: an income-producing version of the Managed funds.
- Multi-Manager income funds: an income-producing version of the Multi-Manager funds.
The range includes 21 asset classes. ‘We try to smooth returns through really diversified portfolios,’ said Hambi. ‘From a strategic asset allocation point of view we are more diversified than ever.’
The asset classes are split between defensive and growth. Defensive assets include cash, some bonds and some absolute returns. Growth assets include equities, high-yield bonds, UK property and some absolute returns. In terms of flexibility between growth and defensive assets, the funds can go 5% up or down against strategic asset allocation targets.
Absolute returns bonds are used as a defensive asset class, and there the investment managers look for low volatility and for returns of cash plus 2% to 3%. By contrast, absolute returns multi-asset funds are used as a growth asset class.
Political risk is also keenly monitored. ‘We have a central thesis and alternative scenarios,’ said Hambi. ‘If Emmanuel Macron hadn’t been voted in as president of France last year, we still had a plan B and plan C.’
For Mike Barrett, consulting director at The Lang Cat consultancy, tools offered by Aberdeen Standard through the Standard Life platform let advisers drill down and see exactly where money is invested. ‘They are pretty transparent with the investment process,’ he said. The service also includes "really useful" reports designed for end clients. ‘These points are often mentioned by advisers and are a bit of a USP,’ Barrett added.
In Bentley’s view, MyFolio gives a broad opportunity set to advisers. ‘They’re not short on choice,’ he said. ‘I’m not aware of a range as broad as MyFolio.’
Bentley pointed out the fund manager is the ultimate driver of performance. ‘If the manager changes, you can’t guarantee a consistent investment approach,’ he said. Bentley highlighted the MyFolio team has largely been in place since launch, while Hambi has overseen the range for the past six years.
For adviser Alistair Creevy, managing director of Glasgow-based advice firm Independent Advisers Scotland (IAS), Hambi is a particular attraction. ‘We like Bambos Hambi, who has a history of managing multi-asset funds,’ said Creevy.
How MyFolio is managed
Hambi said MyFolio offers ‘low-cost funds of trackers and active management’. And he highlighted the benefits of the range’s active and passive options. ‘Advisers like to mix and match,’ he said. ‘With us they can, for example, go 40% passive and 60% active.’
MyFolio also has more than 60 investment specialists. ‘I don’t know anyone else with that kind of number behind a fund range,’ said Hambi. And he stressed Aberdeen Standard is one of the few multi-asset managers to hold absolute returns funds (although none are used in the passive range).
Hambi said the range is managed using the following four-step process.
1. Pick the right asset classes and get the right long-term strategic asset allocation. A committee of eight, including Hambi, looks at this. It works with Moody’s Analytics, including its Economic Scenario Generator.
2. Apply a tactical asset allocation approach, taking a three-to-18-month view.
3. Pick the right funds and combine correctly.
4. Rebalance regularly, to ensure funds stay in line with risk profiles.
Regarding fund selection, Hambi has a 13-strong team, all qualified with the CFA Institute, that meets 250 to 400 managers a year. It looks at criteria such as style, risk and market cap biases. ‘We undertake forensic analysis of how managers manage money,’ said Hambi.
Most meetings with managers are on the qualitative aspects of research. And Hambi said they use the ‘five Ps’, namely philosophy, process, people, performance and price. Process refers to whether there is a robust, repeatable process regarding stock picking, sector positioning and risk taking, and whether there is a focus on, say, price-to-earnings ratios or cashflows. Regarding people, the MyFolio team particularly wants to know if management of a fund is down to a key individual or a team.
Charges and performance
Charges on the MyFolio fund range were reduced in November 2017 by between 0.15% and 0.325%, dependGars outflows are about punishment more than performanceing on share class.
‘The MyFolio Market is now at 0.35%. This is good: it puts them in the cheapest quartile against multi-asset funds as a whole, including both active and passive funds,’ said Abraham Okusanya, director of research consultancy FinalytiQ.
But Okusanya pointed out passive multi-asset ranges from Vanguard (the LifeStrategy range) and BlackRock are cheaper, at 0.22% and 0.24%, respectively. In addition, Okusanya said: ‘The entire MyFolio range is still quite expensive overall, with charges for Managed funds averaging 0.84% and those for Multi-Manager funds at 1.3%.’
The key question, though, is how well the MyFolio range has performed. Bentley added: ‘My perception is the best performing MyFolio range would be the Market range, then the Managed range and finally the Multi-Manager range. There is, then, a strong correlation between outperformance and price.’
And indeed, the Market III (balanced) fund, has performed quite well in terms of its Citywire rankings. Its retail share class (which is ranked against the retail share classes of rival funds) ranks 84 (out of 382) over one year; 72 (out of 313) over three years; and 62 (out of 266) over five years. Meanwhile, the Managed III (balanced) fund ranks 94 over one year, 148 over three years, and 98 over five years. And the Multi-Manager III (balanced) fund ranks 112 over one year, 135 over three years, and 110 over five years. This bears out Bentley’s contention.
Chart 1 (below) shows the institutional version of the Market III fund has performed in line with the LCI UK Balanced and International Equity index for the course of the fund’s life.
By contrast, the Managed III has slightly underperformed the LCI index for the course of the fund’s life, has had long periods of outperformance and relatively shorter periods of underperformance. And the Multi-Manager III has had some periods of outperformance against the LCI index, long periods of underperformance, and has underperformed the index by 10.5% for the course of its life.
What is perhaps most notable here is the long periods of underperformance of the lower charging passive Market III fund against Managed III. But this might be related to a higher volatility in the Market range.
Bentley said: ‘If I look at the riskiest portfolio, risk level V, Multi-Manager has a volatility of around 7.5%, Managed has 8%, but Market is nearly 10%. But these are being managed to a volatility target, so they should be equal.’
And indeed, this higher volatility is reflected in Chart 3 (below), where the Market range underperforms both the Managed and Multi-Manager ranges in terms of risk-adjusted returns over five years. Over three years (see Chart 2, below), it underperforms Multi-Manager but performs in line with Managed.
‘If I was a customer I might want an explanation, if I cared,’ said Bentley. ‘But most customers wouldn’t know a standard deviation from a kick in the backside.’
But a spokesperson for Aberdeen Standard Investments said they create portfolios with a 10-year outlook for forecast volatility. They added that, in the last few years, the volatility of equity markets has been very low by historical standards: ‘As such, the realised volatility of all the portfolios is less than we would have expected. In addition to this, we have absolute return exposure in the Managed and Multi-Manager ranges which is there to act as a volatility dampener in times of stress.
‘Where volatility is historically low, the impact of this volatility protection on the portfolio can look proportionately higher. Overall, we expect our portfolios to have broadly similar risk profiles from a customer perspective, albeit the differences in asset mix and holdings between the ranges means the absolute volatility numbers will be different.’
Of greater concern, though, is over five years all MyFolio ranges underperformed FinalytiQ’s ‘No Brainer’ portfolios.
The No Brainer portfolios combine, in varying proportions, the MSCI World Index (for equity allocation) and the Bloomberg Barclays Global Aggregate index (for bond allocation). And, over three years, the No Brainer range was a better overall performer than the MyFolio ranges, even if the outperformance was less consistent than in Chart 3.
Moreover, the low cost passive Vanguard LifeStrategy range had better overall risk-adjusted performance than the MyFolio ranges over both three and five years. LifeStrategy’s outperformance was most notable at higher volatility levels.
But the Aberdeen Standard spokesperson said: ‘Comparing our funds to the Vanguard funds is not something we would do as a matter of course.’
The spokesperson pointed out two ranges of funds employ different asset allocation methodologies and different mixes in terms of asset classes and geographic spread. Consequently, Aberdeen Standard expect that, at different points in the economic cycle and over different time periods, the relative performance of the ranges will change.
‘The numbers in the article are over a specific three-year time period,’ said the spokesperson. ‘But I am confident, if the same analysis was undertaken over the last 12 months, the results would look different.’
They added that comparing MyFolio funds against the No Brainer equity/bond benchmark, in a period where there have been equity and bond bull runs, is ‘not helpful’ for clients. ‘Market conditions since 2008 have been supportive for investors, but it is easy with hindsight to acknowledge this.’
However, Okusanya pointed out: ‘If you are paying a manager, the idea is they are giving some kind of value over and above the market return. And, in that regard, I don’t think the MyFolio range lives up to expectations.’
However, the Aberdeen Standard spokesperson countered the MyFolio range was launched more than seven years ago ‘and during that time we have aimed to deliver strong predictable returns for our clients’. The spokesperson added UK advisers undertake extensive due diligence before adopting MyFolio as part of their customer proposition.
‘Advisers have recommended MyFolio to tens of thousands of their clients, a number that is growing every day,’ they said. ‘We do not believe this would be the case unless we were consistently delivering the risk outcomes and exceeding the performance expectations of their clients.’
Yet to be tested
Creevy said IAS uses MyFolio as a large component of its centralised investment proposition. ‘It fits in nicely for the £50,000 to £250,000 investment range,’ he said. Interestingly, Creevy likes to blend MyFolio with LifeStrategy: ‘Vanguard offers a different approach and compelling costs.’
But Creevy is concerned LifeStrategy uses ‘a simplistic equity/bond approach, with no property or hedge funds’. He says, in a volatile market or downturn, alternative strategies are required in addition to equities and bonds.
The Aberdeen Standard spokesperson added that, as active fund managers, the MyFolio team are focused on positioning funds for what may happen in the future rather than what has happened in the past. ‘We construct actively managed balanced portfolios using up to 21 asset classes,’ they said. ‘This should help mitigate downturns in individual markets and not leave clients overly exposed to a single position.’
Okusanya, though, points out most multi-asset funds were launched after the 2008 financial crisis and have not been tested in tough market conditions. As such, their downside protection is uncertain.
‘Suppose you lose 1% to 2% a year in the MyFolio range compared to LifeStrategy, then over five years that’s an underperformance of around 10%,’ said Okusanya. ‘Even in a market downturn, MyFolio would have to do really well to make up for the lost ground of the good market conditions.’