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Investment  >  Advisory Committee  >  Meeting Summaries  >  Meeting Summary for 26th April 2006

Meeting Summary for 26th April 2006

For professional advisors only.

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

The meeting of the Royal London Investment Advisory Committee (IAC) covering the results for the 1st quarter of 2006, took place on Wednesday, 26 April 2006.

Review of Minutes   

The minutes of the IAC meeting held on 25 January 2006 were reviewed and agreed.

Review of Benchmarks

The quarterly report from Barrie & Hibbert (B&H) was presented by Andrew Barrie.  The level of downward slope to the real yield curve is significantly different from that used to derive the original calibration of the model.  B&H will carry out a sensitivity analysis to consider what impact this change may have on the benchmark allocations.  However there was little support for changing the fundamental shape of the assumed real yield curve. 

Experience volatility within equity portfolios has been significantly lower than assumed in the model but again there was little support for change to the model assumptions.  A discussion took place around the level of risk in the property portfolio (and the correlation with the equity portfolio).  The construction of the IPD index was discussed and Andy Carter agreed to prepare an explanatory note on the subject; it is likely that the difference in performance between the IPD index and the actual property portfolio is not being fully captured by the model.

The overall level of active risk being taken within the three managed funds is low, Adventurous Managed fund in particular.  One of the issues here is that all three funds obtain their equity exposure via holding the Global Managed fund; this means that it is difficult to obtain a higher stock specific risk within the Adventurous Managed fund vs Defensive Managed fund.  Some form of core:satellite structure would be required to address this issue; Royal London Asset Management (RLAM) are about to launch a new actively managed equity fund and it is intended that this will provide an opportunity to access higher stock specific risk.

Further work is needed to remove the timing impact of index and actual fund valuations where small differences in the valuation timing is causing discrepancies in the quarterly relative performance.  This anomaly tends to produce a back to back pattern to the relative performance figures and overstates the true underlying experience tracking error.  David Rose will take this forward and prepare a recommendation for IAC. 

The excellent performance of the nine managed strategies relative to the fundamental objective of maximising the real return on the portfolios and the performance of the three RLAM managed funds relative to their respective benchmarks were noted.

It was noted that the analysis of quarterly relative performance figures do suggest that the three RLAM managed funds are being managed with a 'beta' of higher than one (ie there is a bias towards outperformance during quarters when the equity market is rising and vice versa).  There is not yet enough data to be definitive about this but we need to be mindful that a higher than anticipated level of systematic risk is not being taken.  However it may be that this effect merely reflects the tactical view from RLAM that equities have been attractive relative to other asset classes.

It was agreed that no change was necessary in either the model calibration or the nine benchmark strategies.

Review of Performance

Robert Talbut presented the quarterly report from RLAM.  Performance for the funds and the Managed Strategies can be viewed in our Monthly Performance Statistics - Pension.

Analysis of RLAM Managed Funds

Over the quarter equity markets have strongly outperformed property and bond markets (where yields have risen).

Both the Defensive Managed fund and Balanced Managed fund outperformed their respective benchmarks.  This has been largely as a result of good asset allocation with an overweight position in equities relative to bonds and index linked bonds in particular.  The Global Managed fund (which provides the equity exposure for the other three funds) has also performed well with good stock selection more than counterbalancing the underweight position in UK equities.

The property fund had a disappointing quarter and this generally dragged performance within the three managed funds.

The Adventurous Managed fund marginally underperformed where the additional impact of strong cashflow, resulting in the average cash balance to be around 3%, has a consequential drag on performance in a rising market.

Analysis of other Royal London Group (RLG) funds

The RLAM report now contains a high level analysis of the performance of all unit linked funds. 

A number of poorly performing funds have been identified and it was agreed that further work is now required to put in place a more robust governance framework for these funds. 

Robert Talbut outlined an issue with the Scottish Life Defensive Managed Life fund where the client specific limits are forcing a high level of exposure to Index Linked in order to maintain the funds overall non-equity weighting within a reasonable tolerance of the ABI peer group.  It was agreed that, subject to a review of any constraints arising from historic marketing material, that revised client specific limits should be agreed. 

Managed Fund Portfolio Weighting for Next Quarter

RLAM remain positive on the outlook for equities over other asset classes but this view has now moderated given the relative performance over the last 12 to 18 months. Other than index linked, yield valuations on bonds are approaching more attractive levels. There is a concern that a degree of complacency may be appearing in equity valuations.

Since the end of the quarter around 2% has been switched from equities into bonds (largely corporates).  RLAM are most cautious about European equities and the switches have largely involved disinvestment from Europe and Far East (ex Japan).

The proposed distribution for the following quarter are noted below:

Defensive Managed fund

Balanced Managed fund

Adventurous Managed fund

--------------------------------------

Fund and benchmark performance table

	30/12/05 to 31/03/06 pgr%	31/03/05 to 31/03/06 pgr%	31/03/04 to 31/03/05 pgr%	31/03/03 to 31/03/04 pgr%	29/03/02 to 31/03/03 pgr%	30/03/01 to 29/03/02 pgr%
Global Managed fund	7.05	29.17	7.93	21.60	-29.73	-7.08
Composite Benchmark: 55% FTSE All Share Index, 45% FTSE World ex UK Index	6.75	28.29	10.79	27.14	-31.17	-4.14
UK Equity fund	8.14	26.31	13.97	22.47	-27.75	-6.04
FTSE All Share Index	7.82	26.75	14.41	29.68	-30.51	-4.13
Property fund	2.00	17.59	14.64	11.07	8.11	6.24
IPD UK All Property Monthly Index	4.19	19.69	16.78	11.75	9.43	6.12

pgr% is the percentage change in price.
Source: Lipper as at 31.03.2006, Scottish Life as at 31.03.2006.  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.