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Investment  >  Advisory Committee  >  Meeting Summaries  >  Meeting Summary 25 January 2006

Meeting Summary 25 January 2006

Attended: Mike Yardley, Brian Duffin, Ewan Smith, Andy Carter, Andrew Barrie (by conference call), Neil Lovatt (in attendance), David Rose (in attendance) and Robert Talbut (in attendance).

The meeting of the Royal London Investment Advisory Committee (IAC) covering the results for the 4th quarter of 2005, took place on Wednesday, 25 January 2006.

Review of Minutes

The minutes of the IAC meeting held on 31 October 2005 were reviewed and agreed.

David Rose and Andrew Barrie confirmed that following investigations into the Royal London Asset Management (RLAM) High Income fund that the risks being taken with the corporate bond funds were consistent with model parameters. Despite the effects of the credit risk on the portfolio the overall risk exhibited by the fund was well within the risk tolerance of the model and therefore was not an area of concern.

Neil Lovatt noted that a letter from Escher (now Close TEAMS) had been received regarding the short term performance of their funds, the explanations in the initial letter were unsatisfactory. Neil Lovatt to circulate this letter and subsequent correspondence to members of the IAC.  

Review of Benchmarks

Andrew Barrie confirmed that there was no change in the joint recommended model parameters and so no change in the benchmarks for the next quarter. The committee agreed that a recommendation of no change should be made to the Royal London Board.

David Rose noted that details of the Barrie & Hibbert Economic Scenario Generator had been passed to Royal London Asset Management for review and comment and he would report back to the next IAC.

Andrew Barrie commented that significant institutional activity in the index-linked market had caused a distortion in the shape of the real yield curve which is now different from the flat curve assumed in the model.

A detailed discussion on the yield curve will be scheduled for the next IAC, Andrew Barrie will prepare a discussion document, and Robert Talbut will also elicit the views of the RLAM bond team. Mike Yardley commented that it would be useful to have a quarterly note of model parameters at each IAC meeting. 

Monitoring Report from Barrie & Hibbert

Andrew Barrie noted that Barrie & Hibbert (B&H) and Royal London Asset Management were able to reconcile most of the differences between the Adventurous fund and its benchmark over time. The B&H analysis did not take account of the transitional period which was accounted for in the benchmark during the initial months of the Managed Strategies project.

It was noted that the RLAM report contained a typing error and therefore the risk of the Adventurous fund was understated. This means a small difference remains in the implied risk of the Adventurous fund as calculated by B&H and RLAM. David Rose and Andrew Barrie to investigate. 

Risk Audit Report

Andrew Barrie noted some concern over the relative differences between the fund and the benchmark in October and November which showed considerable differences in performance and would not have been expected given the risk analysis of the fund.

Andy Carter noted that this was due to the differences in timing of the underlying funds (which were valued at 12 midday) as opposed to the benchmarks which reflected close of day prices.

In the event of a significant market move from midday to close of business this can result in an artificial tracking error in the reported statistics.

Neil Lovatt noted that this would also cause significant issues with regard to the presentation of relative performance figures and this was clear from the differences between the end November and end December investment performance figures.

Mike Yardley requested that the IAC investigate ways of reducing these apparent differences for the purposes of reporting to the IAC. David Rose to progress.  

Robert Talbut noted that the we would not be able to publish benchmark data taken at any other time than close of business, however non close of business data could be used for internal risk analysis purposes and flagging up any potential performance issues to Scottish Life.

Cohort analysis

Andrew Barrie referred the committee to the cohort analysis of the main underlying funds and the consistent positive performance experienced by investors over the last 12 months.

Andrew Barrie noted that the little underlying data which existed did seem to illustrate that the funds exhibited properties which reflected a slightly higher Beta than one. Andy Carter noted that it was possible that this was a reflection of the tactical asset allocation positions of the fund rather than the underlying funds which in all cases but one have a Beta of less than one.

Andrew Barrie will investigate this further to identify where this higher Beta may be emerging. 

Review of Performance

Robert Talbut updated the IAC on the performance of the funds in December. Since inception in all cases except the Adventurous Managed, the funds had outperformed their benchmarks. In the case of the latter fund the main reason for this was a relatively high cash holding (see below).

In 2005 all the funds have outperformed their benchmarks.

Risk budget analysis

It was noted that all funds are operating well within their risk budgets.

Mike Yardley observed that all the risk graded funds were taking a similar amount of risk, and asked whether RLAM intended to make further use of the risk budget in future.

Robert Talbut noted that a deliberate decision was taken to control the extent to which the risk budget was utilised since inception but that this had not prevented the resulting positive relative returns in 2005. However RLAM would consider making further use of the risk budgets when they saw the opportunities arise in the future. Robert Talbut also mentioned that he did harbour the view that the quoted risk numbers may well be understating the actual risks being taken.

Analysis of other Royal London Group (RLG) funds

After considering all the relative performance of the RLG unit linked investment funds the IAC requested David Rose create a filtering process (initially analysing those funds in the 95th percentile ranking in their sector or above) and producing a simple analysis on the reasons for the fund’s relative position.  

David Rose also noted that he would add data on the size of each fund and the timing of the fund pricing which may affect relatively comparisons.  

Performance summary sheet

Mike Yardley requested that the performance summary sheet be produced on an since inception, 3 month and annual basis going forward. Neil Lovatt to action 

Managed Fund Portfolio Weighting for Next Quarter

Robert Talbut outlined the intended distributions of the three managed funds over the next quarter.

Defensive Managed Pension fund

	Benchmark	RLAM	Relative
Equities - UK              - Overseas	15.25 12.25 27.50	18.25 16.25 34.50	+3.00 +4.00 +7.00
Fixed interest gilts	Nil	Nil	Nil
Corporate bonds	30.00	28.75	-1.25
Index linked gilts	25.00	21.50	-3.50
Property	17.50	15.25	-2.25
	100.00	100.00

Balanced Managed Pension fund

Adventurous Managed Pension fund

RLAM remain overweight in equities relative to bonds. Within the equity portfolios, UK, European and Far Eastern (inc Japan) equities are preferred relative to US equities however they are less bearish on US equities than in recent months.

RLAM remain underweight in bonds and remain largely ambivalent between government and corporate debt.

Robert Talbut noted that the team felt that they had perhaps been too cautious in their asset allocation policy towards Property in the recent past, especially as it was a next best substitute for inflation hedging against inflation risk given their bearish stance towards index linked. However the team did not feel that now was the time to be taking a more positive stance on property exposure and hence reverse their stance.

It was also noted that the Adventurous Managed fund’s performance had been affected by a relatively large cash weighting over the quarter. David Rose noted that this was solely due to the increasing size of the fund. It was mentioned that more regular monitoring of cash inflows was now taking place.

David Rose will report to the next meeting on the average cash position over a month in each portfolio for the IAC to review.  

Managed Strategies Fund Matrix

Neil Lovatt outlined the proposals for the Managed Strategies Fund Matrix and noted that the IAC would be required to set out objective criteria under which they would automatically review an investment fund.

This criteria would be initially proposed by Scottish Life for consideration by the IAC but would include tracking error to the defined benchmark for each Matrix "cell". In addition Scottish Life would include a note on the role and responsibilities of the IAC within the Matrix governance process.  

Additionally Old Broad Street Research (OBSR) would also alert the committee to any qualitative issues (such as a change in direction by the fund) which would warrant further consideration by the committee.

Upon consideration OBSR would supply data to the IAC on their view of the fund and the continued suitability of the fund. This will allow the IAC to consider further action, which would ultimately include removing the underlying fund.

In addition OBSR would formally report on each fund on an annual basis.

Mike Yardley asked if the IAC were currently being asked to formally approve the current proposed fund range. Ewan Smith clarified that this should be conducted by the Royal London board which was meeting in February and the IAC will be involved in reviewing the funds on an ongoing basis once approved.  

Robert Talbut asked for clarification that there was no conflict of interest with two senior members of RLAM making decisions on the basis of the suitability of the funds. Neil Lovatt clarified that as these funds were always reserved for external non RLAM funds then no conflict of interest should arise.

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Fund and benchmark performance table

	30/09/05 to 30/12/05	31/12/04 to 30/12/2005	31/12/03 to 31/12/04	31/12/02 to 31/12/03	31/12/01 to 31/12/02	29/12/00 to 31/12/01
	pgr%	pgr%	pgr%	pgr%	pgr%	pgr%
Global Managed fund	5.51	23.16	5.36	16.84	-24.90	-18.03
Composite Benchmark: 55% FTSE All Share Index, 45% FTSE A World (ex UK) Index	5.22	22.14	9.50	19.64	-25.52	-14.42
UK Equity fund	3.96	20.48	10.61	15.10	-21.42	-16.30
FTSE All Share Index	4.01	20.83	11.71	19.66	-23.45	-14.16
Property fund	5.99	17.50	16.44	9.91	8.45	5.75
IPD UK All Property Monthly Index	5.82	17.65	17.70	10.13	9.35	5.99

pgr% is the percentage change in price.
Source: Lipper as at 30.12.2005, Scottish Life as at 30.12.2005.  All performance figures, including the figures shown for the growth in benchmarks, have been calculated net of the annual management charge for each fund (1%). Past performance is not a guide to the future. Prices can go down as well as up. Investment returns may fluctuate and are not guaranteed.

The past performance information shown may not be current.  Up to date past performance information for these funds can be obtained from Scottish Life's Monthly Performance Statistics - Pension.