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informerfor f inancial advisers onlyOctober 2010

contributions from:

holdin¯ firm a new innovation in protected funds

The names of Managed Funds don’t always reflect their true volatility. So how can you be sure they match a client’s risk profile?

Our new Managed Fund Analyser makes it quick and easy to find the answer. Now you can check their historic volatility, by sector and by individual fund.

If you find a fund’s performance is not what its name suggests, why not use our risk-profiling and matching tools to replace it with

something more appropriate - and more controllable?

Caut!ous, Ba!anced, Act!ve?

The new Managed Fund Analyser is now available on www.managedfundanalyser.co.uk

editorial October 2010

welcome to the October 2010 edition of informer

A major misconception about innovation is that it’s all about coming up with ideas. In reality

innovation is much more than the spark of an idea. That’s why companies like Google allow their workforce a day every single week to continue working on a side project – an initiative that had led to developments like Gmail, Google News and Adsense. Real innovation takes time, creative thought and expertise.

When you tap a word into the Google search box, have you ever thought how it manages to deliver all those results in the blink of an eye? While the front page is very simple, the back end – the engine – is a complex system of thousands of servers being trawled at breakneck speed. Of course, that’s of little concern to the end user who is simply interested in getting the most relevant results in an understandable format.

Innovation in the financial services has been known to take a similar approach. Creating products and services that give the customer a simple view of the ‘front end’ without really knowing what is going in the engine or the results they’re likely to get. This is an approach that has sometimes resulted in poor outcomes – some with-profits and managed fund propositions come to mind. Perhaps in these cases the firms put too much emphasis on an idea, too much focus on the proposition at the front end and too little effort into building an engine at the back end that provides what the customer is looking for.

Our platform proposition is focused on giving customers the outcomes they expect. Our robust investment process is the engine that helps you to ensure your clients’ investments perform in line with their own attitude to risk. We’ve taken the

same approach with our new protected fund offering – the Skandia Shield Fund. The focus is on ensuring that those of your clients who wish to protect against a dramatic market fall can do so with confidence that gains are protected at 80% of the highest price, with no cash-lock.

Like Google, we have a dedicated team of experts in Skandia Investment Group providing the innovation and ensuring it offers more than a ‘me too’ structured product with a protected element. You can read more on Shield starting on page 10.

We continue our theme of fund innovation from page 14, looking at new innovative fund solutions from Fidelity, HSBC Global Asset Management and Allianz Global Investors.

I hope you find this month’s informer an enjoyable and interesting read.

Kind regards,

Peter MannCEO, SkandiaUK Group

contents4 briefin¯ the latest news from Skandia

5 explodin¯ the myths of ethical investment National Ethical Investment Week 2010

6 se¯mentin¯ your proposition segmentation and client suitability

8 define your approach the end of contracting out in defined benefit schemes

10 holdin¯ firm introducing the Skandia Shield Fund

12 aimin¯ hi¯h, playin¯ safe an introduction to how the Shield Fund works

14 a view from Brazil the Allianz RCM Brazil Fund

16 broader horizons the HSBC Open Global Property Fund

18 flexin¯ fixed income the Fidelity Strategic Bond Fund

October 2010 informer 3

briefin¯ the latest news from Skandia

Last month in informer we introduced our new website for you and your clients. The website will be live before the end of October 2010 at www.skandia.co.uk for customers and our dedicated adviser site at www.skandia.co.uk/adviser

Online support

new Skandia website

Ethical investments

The third National Ethical Investment Week (NEIW) takes place in November and there’s plenty of ways you can get involved.

NEIW is organised by UKSIF, the sustainable investment and finance association, with support from leading product providers, financial services trade and promotional bodies and non-governmental organisations.

You can use NEIW to deepen discussions with your clients, or attend NEIW events yourself to learn more about how green and ethical investment is developing and expanding.

To learn more about what you can do to help your clients make the most of green and ethical investments visit www.neiw.org/advisers

National Ethical Investment Week7-13 November 2010

ethical investment seminar atSkandia House Skandia is hosting a free NEIW event for advisers at Skandia House in Southampton from 10.30am - 1pm on 5 November 2010. Speakers include:

• Penny Shepherd MBE, CEO, UKSIF

• Ketan Patel, Socially Responsible Investment Analyst at Ecclesiastical Investment Management

• Simon Gottelier, Investment Manager at Impax Asset Management

• John Ditchfield, Director at Barchester Green

A buffet lunch will follow the presentations at 1pm.

If you would like to register your attendance, e-mail [email protected]

Read our introduction to NEIW from Penny Shepherd MBE, CEO, UKSIF on the opposite page.

around the siteHere’s a snapshot of what you can see at skandia.co.uk

Why Skandia? See what Skandia Investment Solutions can do for your business in our two minute video >>

Using our platform: Handy hints and support when using Skandia Investment Solutions >>

Fund news: All the latest fund events, regularly updated and easy to navigate >>

Investment process: How ourinvestment solutions fit with your advice process >>

Informer: All your informer articles and more >>

The site has a fresh, updated design, with more content for you and your clients. Our adviser site reflects all of our latest news and developments, including an area dedicated to informer articles online.

We would love to know what you think of our new site and any feedback on how you think it can be improved – let us know at [email protected] or send your thoughts to @skandia on Twitter.

4 informer October 2010

High profile events such as the recent oil spill in the Gulf of Mexico show the major impact that environmental

risks can have on a company’s financial performance. Consumers are increasingly aware that the long-term investment choices they make can be touched by these issues. At the same time, more people realise that their own lifestyle choices on issues like recycling or purchasing fairly traded groceries can also be extended to their investment decisions.

One of the ways you can respond to the growing interest in the social and environmental impacts of investments is to use the third annual National Ethical Investment Week (NEIW), taking place this year from 7-13 November 2010.

Research carried out for NEIW last year found that half of investors are interested in making money and making a difference through their saving and investment decisions, as long as they can do both at the same time. Green and ethical investing is no longer just a minority concern. This increasing interest from clients, and potential clients, presents a real opportunity to offer added value advice.

myth bustin¯ NEIW offers a great opportunity to debunk some of the outdated myths that still exist about green and ethical investing.

Myth 1: Green and ethical investing means a specific set of products, particularly those with negative screens.

Fact: Green and ethical investing is an investment philosophy that combines environmental and social criteria with conventional investment criteria to meet both a client’s financial objectives and any

social or environmental objectives. It is defined by use of this philosophy not by any one specific technique.

Many modern green and ethical investments aim to help investors make money and make a difference in society at the same time. For example, they may use thematic investing, selecting companies offering profitable solutions to particular social or environmental problems. Although certain companies may be excluded because they don’t address the themes selected, the primary aim of these investment techniques is to make the best positive choices. Negatively screened ethical funds can be selected for those that want to avoid profiting from certain activities but this is not the only aspect of green and ethical investing.

Myth 2: You need to sacrifice financial performance.

Fact: 90% of wealth managers responding to a Summer 2009 survey said that their green and ethical investing portfolios had performed the same as or better than their other portfolios.

Myth 3: Green and ethical investors are mainly teachers and social workers.

Fact: Financial advisers report a wide range of ‘non-traditional’ clients interested in green and ethical investment today, including younger entrepreneurs and those inheriting wealth.

Myth 4: It’s all or nothing.

Fact: Many modern green and ethical investors choose to ‘dip a toe in the water’ by mixing some green and ethical options with their other investments.

supportin¯ NEIWVisit the NEIW website (www.neiw.org) to see how you can get involved. You could attend a NEIW seminar (see opposite page for details of Skandia’s event) to learn more about green and ethical investing opportunities or hold your own event to engage new and existing clients. During NEIW last year, supporters organised 33 events in 16 towns and cities across the country for consumers and advisers, while advisers and consumer groups also distributed materials and spoke to their local media. This year’s sponsors are The Co-operative Financial Services and Ecclesiastical Investment Management. We expect 2010 to be even bigger and better and we look forward to working with more advisers than ever before.

Penny Shepherd MBE, is Chief Executive of UKSIF – the sustainable investment and finance association.

explodin¯ the myths of ethical investment

National Ethical Investment Week 7-13 November 2010

As we approach the third annual National Ethical Investment Week, Penny Shepherd MBE addresses some common myths about green and ethical investing.

For more information on National Ethical Investment Week 2010, visit www.neiw.org or e-mail [email protected]


advice proposition

Jeremy Mugridge explains why segmentation holds the key to selecting suitable platform propositions for your clients.

Where a platform solution is appropriate for a client, the process of selecting the one that

best meets their needs is not easy. There are more and more platforms entering the market and the FSA is increasing its focus on this area of the financial advice market, particularly in terms of how you make your final platform recommendation to a client.

Although our platform due diligence tool (www.skandiaplatformwatch.co.uk) has helped to simplify the process of selecting the right platform for you and your clients, there’s another part of the jigsaw which you need to address before you even start to compare the various platforms in the market. Segmenting your proposition into a number of distinct service levels is a key element within the process of selecting the most suitable platform for a client.

start with a blank sheetLet’s remind ourselves of what the FSA expects:

“We expect firms to undertake due diligence on the platform(s) they intend to use to help ensure the selection is suitable for clients

… this may involve client segmentation and using more than one platform in order to deliver different services to different types of client.”FSA Investment Advice and Platforms: Project Findings, March 2010.

The most obvious approach to take would be to spend a period of time segmenting your existing client bank and then develop propositions to meet the needs of each segment.

We think you should turn this approach on its head and start your segmentation process with a clean sheet of paper. As a starting point, why not decide how you want to segment your proposition, regardless of your existing client bank? The propositions that you might develop will of course be heavily influenced by your general knowledge of what clients want, and will also take into account the skills available within your firm and where you want to take your business in the future.

As an example of how this might work, we’ve outlined four sample service propositions on the opposite page, each

accompanied by an adviser remuneration model. Once you have segmented in this way, it is then much easier to comply with the RDR adviser charging requirements.

These examples are for illustrative purposes only. In reality your service levels are unlikely to look exactly the same or span such a wide spectrum of client needs. Your remuneration structures will be tailored to your business and the percentages shown opposite should not be taken as a definitive guide to how much advisers should charge for a particular level of service. Percentage fees have been used in these examples, however you may decide to replace these with monetary fees when constructing your own segmented service proposition.

next stepsHaving defined your service propositions, you now need to select the platform that’s best equipped to deliver each service level. It’s important to remember there could be service levels where a platform is not required. Where a platform solution is appropriate, this could be a single platform,

Jeremy MugridgePlatform Marketing Manager


or most likely, you may need to partner with more than one platform within your business. Recent FSA musings lead us to believe that although one platform per adviser business is possible, it will be difficult to justify in practice.

Once you’ve determined your service propositions and completed your platform due diligence, you will then need to work closely with each of your clients to agree which service level best meets their needs. If clients don’t require any of your newly defined service propositions, you may need to consider losing them as a client, rather than trying to offer them an alternative service level that you’re unable to deliver profitably.

Taking the time to segment your service proposition will give you greater control over the future of your business and will help you deliver a level of service and a charging structure that meets the needs and expectations of your clients. In addition it will also help to keep you on the right side of the regulator which can’t be a bad thing.

sample service propositions

Service level 1 This service level is aimed at a segment of clients that just want you to set up an

investment for them but don’t require any ongoing advice. The client will be either happy to manage the portfolio themselves or they may choose to invest in a risk rated fund, such as a Skandia Spectrum fund.

Initial fee: up to 3%* Annual fee: 0%

Service level 2 This meets the needs of those clients that have a need for ongoing financial advice

but want to keep the overall costs to a minimum. Their portfolios could include lower cost tracker funds and although they require an annual review, this can be posted to them, rather than being face to face. Using pre-defined portfolios could be a good way of dealing with these clients and Skandia’s Signature range might also be used where more guidance is required within a particular asset class.

Initial fee: up to 3%* Annual fee: 0.5% (0.35% portfolio management and 0.15% portfolio review)

Service level 3 These clients want to invest predominantly in actively managed funds but are still

somewhat price conscious, so pre-defined portfolios constructed from Skandia’s Self Select fund range could be a good way of managing their money. They have a need for ongoing communication and a face-to-face annual review will be required.

Initial fee: up to 3%* Annual fee: 0.75% annual fee

(0.50% portfolio management and 0.25% portfolio review)

Service level 4 This offering is aimed at those clients requiring a tailored and highly personal level

of service. They require access to a wide range of actively managed funds and may also want to include other wider investment types outside Skandia’s Self Select fund range. The portfolio that you construct will be bespoke to them and they will require a face to face meeting at least twice a year to review their portfolio(s).

Initial fee: up to 3%* Annual fee: 1.00% annual fee

(0.65% portfolio management and 0.35% portfolio review)

*Initial fee menu• 1% Risk profiling interpretation• 0.5% strategic asset allocation• 0.5% tactical asset allocation• 1% fund selection

The initial fee that a client pays will depend on the level of initial advice that they require.

Our Platformwatch tool is designed to help you with your platform due diligence process and is available to all financial advisers at www.skandiaplatformwatch.co.uk


The focus for pensions in recent months has been the coalition government’s consultation

documents and their impact on pension provision. The issues being given the most air-time are the potential change to both the funding rules for private pensions and the way in which the decumulation rules will change for income withdrawal up to and beyond age 75.

Whilst these are very significant issues, of possibly equal consequence is the consultation document issued by the Department for Work and Pensions focusing on ending contracting-out in defined contribution schemes that comes into effect from 6 April 2012.

consultation The document included draft consequential legislation aimed at tidying-up the current plethora of rules. The main news story from the consultation is the impact on clients wishing to transfer benefits from contracted-out defined benefit schemes where they have either or both Guaranteed Minimum Pensions and S(9)(2)(b) rights

included in their entitlement. Currently, an individual with such benefits is able to transfer benefits within the UK to one of:

• Another defined benefit contracted-out scheme able to accept the existing contracted-out liability.

• An S32 buy-out policy meeting the guaranteed liabilities of the transferring scheme within the cash equivalent transfer value.

• An appropriate personal pension scheme, or contracted-out money purchase scheme (COMPS), where the contracted-out liabilities currently convert to Protected Rights within the receiving scheme.

With options such as income withdrawal for both Non-Protected and Protected Rights, and the potential ability to ‘phase in’ their retirement programme, the latter option can provide a client with more flexible retirement planning opportunities than providing a scheme pension.

The statutory instrument as currently drafted will, effective from April 2012, withdraw the ability for a client to transfer

Adrian Walker highlights why action is needed to plan for the impact of the end of contracting out in defined contribution schemes.

the knowled¯e

define your approach

Employers may actively seek advice on how to deal with long-term deferred members who are most likely to have built up such entitlements

“

”

Adrian WalkerPension Development Manager


any such right to a personal pension scheme or COMPS. A client will then only have the choices of:

• leaving the right in the current scheme with income payable as a scheme pension, the format being determined by the scheme rules, or

• transferring the entitlement to another contracted-out defined benefit scheme that can hold the guaranteed rights, or

• transferring the entitlement to a S32 buy-out contract which will reproduce the format of guaranteed contracted-out benefits included with the client’s accrued entitlement.

If there is no change to the proposed legislation there will be significant implications for employers, as well as for scheme members and their advisers.

For employers there is the need to consider the longer term implications of continuing to run such schemes beyond April 2012. At that point there may be restricted options for winding-up the scheme and potentially the need to ensure that any scheme deficit is fully funded before a wind-up can be considered.

consequencesA consequence of these changes might be that more employers seek alternative solutions for their members. At the very least they are likely to actively seek advice on how to deal with long-term deferred members who are most likely to have built up such entitlements and perhaps buy them out of the scheme before April 2012.

For advisers who are aware of the potential implications of this legislation in respect of previous retirement planning, there are some immediate opportunities for valued advice:

• How many clients have deferred benefits in contracted-out defined benefit schemes?

• How many clients of professional connections may be in a similar situation?

• How would such restrictions on transfer change their current long-term retirement planning?

Transferring funds from defined benefit schemes into a money purchase registered pension scheme is no panacea for guaranteed future retirement comfort. Continually updated guidance from the pension regulator about the analysis needed when such transfers are considered lays testament to this. However, access to more flexible retirement options is for some an intrinsic part of retirement planning, as is the potential value of lump sum death benefits when compared with existing scheme options. This issue becomes more important when Protected Rights cease to exist, as the need to provide an income for a surviving spouse or civil partner from that source of funds disappears in favour of a non-taxed lump sum.

It may well be that the underlying financial strength of the scheme and sponsoring employer are issues for clients with large deferred pension rights in such schemes. The potential cut in their benefit value if the scheme was to fall into the

Pension Protection Fund would become a serious point of consideration.

If the choice to transfer away is limited to the next 18 months there will be a need to undertake a review of a client’s expected retirement planning. Considerations include:

• Possibility that income from the scheme could be less flexible when set against intended needs.

• When it may be best to take the income from the scheme.

• Protection planning to take account of the different style of anticipated death benefits that might now be available if benefits stay in the scheme.

• Whether income for the spouse or civil partner, either before or after retirement, would be affected by remaining in the scheme.

All of the above points have to be balanced against the security and potential loss of benefits from the ceding scheme.

While we hope the responses received from all parts of the industry, including employers, may persuade the DWP to rethink this issue, advisers cannot afford to wait indefinitely for the outcome which is not anticipated until well into 2011. Identifying those clients affected should be the first step ahead of reviewing those plans in the knowledge that change is around the corner. Taking into account the other changes we are likely to see to private pension provision, action is once again the watchword.

This document is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at September 2010. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.


holdin¯ f irm investments

Graham Bentley introduces Skandia Shield – an innovative new protected fund offering. Graham Bentley

Head of Investment Marketing

Over the last two editions of informer I may have mentioned my thatched cottage more than once

to demonstrate the sense in protecting something you value against a low probability, high impact event such as my roof catching fire or, by analogy, market falls. Having thoroughly considered the reasons for capital protection over the last two months, let me delay le denouement no further and introduce our innovative new fund.

The Skandia Shield Fund is provided by Commerzbank in partnership with Skandia Investment Group. It offers investors the opportunity for growth but with protection against a low probability, high impact event such as a 20%+ fall in markets.

Having listened to our customers and followed up with market research we not only confirmed our suspicions that there was a distinct need for protected investments but also determined it was essential for any solution to be platform-friendly, offer value for money and demonstrate Skandia’s unfailing ability to innovate. It would be too

easy to offer a ‘me too’ structured product incorporating a protected element. As a result of our deliberation we have built a fund that meets those needs and more: an open-ended, daily traded, risk-targeted protected fund that locks in gains at 80% of the highest price and one that cannot cash-lock. If that wasn’t enough, the fund comes with an unbundled annual management charge of 0.80% and TER of 0.90%.

‘lockin¯-in’ ¯ainsImportantly, the fund’s protection level is 80% of the fund’s highest ever price; not 80% of your initial capital or 80% of something more complex that some other products might use. This means that as the fund exceeds its previous highest price, investors’ gains are ‘locked-in’ and afforded the aforementioned protection.

Consequently a client investing at launch would receive a price of 100p, of which immediately 80p is protected and by the time the price has increased to 125p, their initial investment would be afforded 100% protection of their original investment. It also means that everybody, whether they invest at launch, or later, has at least 80% protection – a key benefit for a user friendly protected product.

So how does the fund work? Before I continue I should point out that to support this launch we will make available a full suite of literature items. This material will range from in-depth explanations of how the different fund components work to client brochures and reasons-why paragraphs. Your Skandia Business Consultant will be happy to discuss the fund in greater detail.


The volatility target of 8% annualised is measured over rolling 20-day periods. The actual experienced fund volatility controls the exposure to the risky assets by a formula. If the volatility over the previous 20 working days is below target, the fund may leverage itself up to a maximum of 150% exposure to the Shield Strategy for the following month. (More overleaf about the Shield Strategy.) Equally should volatility be greater than the target, a proportion of the fund will be allocated to cash for the following month to compensate. In extreme market conditions this means that 100% of the fund could be held in cash but, importantly, that does not mean it becomes cash locked.

no ‘cash lock’Certain protected funds suffer from the risk that, if the market suffers a prolonged downturn, their asset allocation strategy may result in 100% cash or bonds exposure for the remaining life of the product, a state known as cash locked. This means that when the market recovers, these funds are not in a position to benefit. The innovative feature of Shield is that because the asset allocation strategy is independent of the provision of the protection, the fund can continue to benefit from the equity exposure inherent in the Shield Strategy and so benefit when the upturn comes.

passive positions Unlike Spectrum, positions in the different asset classes will be taken on a passive basis – which again means keeping costs low. The fund will have investment exposure to equity and fixed income indices in a number of countries and markets. Importantly the Shield Fund will benefit from the total return of these investments less the effect of the premium payable for protection and after fund charges are deducted. This means Shield benefits from the reinvestment of dividends and interest unlike a lot of structured products on the market. Also, unlike Spectrum, active asset allocation decisions will be taken to produce the optimum risk/return profile to achieve the target volatility of 8%, but again, more on that, overleaf.

So for whom might the Skandia Shield Fund be appropriate? The fund should prove attractive to those clients who need some certainty but also opportunity. This might include those approaching and in retirement; who are spending rather than accumulating, those who are nervous of exposing their

savings to stock markets for the first time but keen for something better than cash returns, or those with a specific liability target they dare not miss, eg school fees.

So despite steering well clear of the Swan Vestas I continue to pay my house insurance. I also continue to sleep well at night safe in the knowledge that should a catastrophe befall the roof over my head, the smoke alarms are fully functional and I am covered by my insurance company. The Skandia Shield Fund might not guarantee your clients a good night’s sleep, but it should certainly help.

The Skandia Shield Fund will launch in November 2010. Overleaf John Ventre explains how risk and returns are targeted within Shield. >>

The fund has a number of different components and different parties responsible for delivering them. SIG advises on the asset allocation, which ultimately delivers performance (see overleaf ). Commerzbank provides the structuring and protection for the fund whilst BNP Paribas acts as custodian and physically holds the fund’s collateral.

The fund aims to provide investors with long-term capital growth

commensurate with a diversified, medium- to low-risk portfolio of equities, bonds and cash.

Like our Spectrum funds, the fund will be run to a volatility

target, in this case 8% (which equates to Spectrum 4) but

unlike Spectrum, Shield will deliver its performance without

actually holding any assets. The fund will instead employ a combination of derivative transactions to replicate the performance of the assets and to deliver the protection required. This avoids the scenario where the fund buys an asset and the protection provider has to buy or sell the same to hedge the risk. That’s a lot of potential transactions, and all those transactions generate a cost. Replication reduces the costs as much as possible, ensuring the contract remains attractive and fairly priced, while delivering what the client expects.

“

”

The innovative feature of Shield is that because the asset allocation strategy is independent of the provision of the protection, the fund can continue to benefit from the equity exposure and so benefit when the upturn comes.

The Skandia Shield Fund client brochure is available on the Skandia literature library.

what do we mean by protected?`Protected’ is not the same as `guaranteed.’ Research has shown that some people take them to mean the same thing, but the difference is important. The protection is offered via a contract with a third-party organisation, known as the `counterparty’.

In much the same way that an insurance company acts as the counterparty on your house contents policy, that contract binds the counterparty to provide the required level of protection. An important risk factor therefore is the financial stability of the counterparty and their ability to meet their contractual obligations. The main counterparty to the Shield Fund is Commerzbank CP.


Over the past few years, Skandia Investment Group (SIG) has developed significant expertise in

the development of risk-targeted multi-asset funds. The risk-targeted Spectrum range was launched in April 2008 and has grown to more than £670 million of AUM, becoming the leading risk-targeted solution within the UK retail marketplace.

Skandia is now partnering with Commerzbank to deliver SIG’s experience and expertise in seeking to maximise returns within risk targets, within an innovative protected fund, Skandia Shield. This protection mechanism can only be provided when combined with a portfolio which exhibits specific historical risk characteristics, meaning this innovative protection solution is a strong match for SIG’s capability.

The Shield Fund will aim to deliver the performance of the Skandia Shield Strategy alongside 80% protection of the highest

ever price which the fund achieves. The Shield Strategy is an asset allocation service provided by SIG. This means that investors will not only be able to access SIG’s leading asset allocation capability through the fund, but will also benefit from a minimum of 80% of the money they have invested in the fund being protected against losses.

Uniquely for the Shield Strategy, the portfolio will target risk and return over rolling 20-day periods, as opposed to Spectrum, which targets risk over rolling 10-year periods. While the tools required to implement these two approaches have some commonality, there are some key differences which are worth talking about.

short-term versus lon¯-term volatilitySpectrum uses a number of inputs to derive a forecast of the next ten years of volatility, which includes historical data of various periods and market implied volatility. In

contrast, the Shield Strategy will use only the previous 20 days of historical data. It is necessary to use this approach in order for the fund to access the capital protection element at an attractive price.

strate¯ic versus tactical asset allocationWhen moving to a short-term risk approach, it is also necessary to become more short term about the expected returns which are used within the model. If we didn’t do this, there would be an inconsistency, and the risk budget would be spent inefficiently from month to month.

active versus passive underlyin¯ investmentsThe shorter-term nature of the Shield Fund’s risk and return targets leads to significantly higher turnover within the asset allocation. The transaction costs involved in using these short-term techniques would be

aimin¯ hi¯h, playin¯ safe The Skandia Shield Fund leverages Skandia Investment Group’s proven expertise in both risk-targeting and tactical asset allocation, while offering investors the peace of mind that at least 80% of their investment is protected. John Ventre explains how risk and returns are targeted within this innovative new product.

John Ventre Portfolio Manager,

Skandia Investment Group


prohibitive if we used SIG’s established ‘4P process’ to select ‘best of breed’ active managers for each asset class. Instead, each asset class will be accessed passively, being linked to the return of liquid, tradable index instruments like ETFs and futures to minimise trading costs.

client suitability As a financial adviser, there are three questions you should ask before considering whether the Shield Fund is suitable for your clients. The first is: does a short-term risk- targeting approach work?

Managing a portfolio against a short-term volatility target of less than one month means that when equities are very volatile, the portfolio will have low allocations to equity and when equities are exhibiting low volatility, allocations to equities will be higher. In order to assess whether this approach adds value, we need to look at when equity returns are likely to be strong and when they are likely to be weak.

The chart shows that equity returns are more likely to be positive in low volatility environments and more likely to be negative

in high volatility environments. This is particularly interesting at the extremes in which very high volatility coincides very often with large negative returns (see the shaded area of the chart) – the correlation between negative returns and high volatility is 0.3 over the last 22 years. This doesn’t mean that it works all the time, but it is statistically significant.

So, we can say with quite a lot of confidence that, provided asset allocation changes can be implemented swiftly and effectively, using a short-term (20-day) volatility target can improve risk-adjusted returns, but you should also ask: what skill does SIG have in tactical asset allocation?

In fact, our capability has added significant value since we began to use it within some of the multi-manager funds which we run. Our two flagship funds – Skandia Diversified and Skandia Global Dynamic Equity – are both first quartile since we began using tactical asset allocation within them.

The final question is: what experience do SIG and Skandia have in sourcing and building protected products?

SIG’s partnership with Commerzbank for the Skandia Shield Fund is part of SIG and Skandia’s larger ambition to develop our protected products capability. As you would expect from an organisation of our size and scale, we have considerable internal expertise to draw on, but in recognition of the important role we think that protected products like Shield have to play within the industry in the next few years, we have built a dedicated team within SIG to manage the product development and risk processes, both for this innovative new product and for future products as we develop our offering.

The Skandia Shield Fund will launch in November 2010

0 10 20 30 40 50 60 70 80 90 100Annualised Standard Deviation All Periods

-30

-20

-10

0

10

20

30

40

Ann

ualiz

ed R

etur

n

Roll ing 20 Day WindowsS&P 500 - Total Return

chart annualised standard deviation: all periods vs annualised return

Source: Factset. 4 January 1988 to 31 August 2010.

Past performance is not a guide to future performance.Full details of the Skandia Shield Fund is available in the client brochure and Simplified Prospectus from launch via the Skandia literature library.


Brazil is currently going through a process of ‘formalising’ its economy. It has recently implemented one

of the most sophisticated tax collection systems in the world. It is a programme called SPED and forms a key part of President Lula’s plan to formalise the Brazilian economy and support its growth with government financing.

SPED is essentially a technology-based accounting system which is overseen by the Brazilian tax authorities. In short, when

a company wants to invoice a customer, it needs to issue an invoice via its trading platform which must be licensed by the Brazilian tax office. The invoice is then sent electronically to the central tax office where it is electronically stamped. It is the tax office which then sends the invoice to the debtor. The intention is to ensure that tax revenues increase and that the informal economy reduces significantly over time. If transactions on the company tax return don’t match exactly with the government

records, then the company either pays a large fine or tax investigators move in. This system has not yet been fully integrated across Brazil but it must be implemented by all local government offices in the near future.

This ‘formalising’ of its economy is a major theme of growth and an important point of differentiation for Brazil – key to raising tax revenues and supporting government spending. It has been mentioned in every single company meeting that I

At the beginning of September Fraser Blain accompanied fund manager Michael Konstantinov on a packed fact finding trip to Brazil, meeting over 40 companies in just one week. In this article Fraser highlights a few of the many innovative investment themes that he believes makes Brazil different from other emerging markets.

a view from


The Allianz RCM Brazil Fund is the first ever UK-authorised, actively-managed Brazil OEIC and is now available via Skandia Investment Solutions.

attended during my recent trip to Brazil, irrespective of the sector that the company is in. It is seen as another growth driver for ‘formalised‘ companies to grow market share from the ‘informal’ economy.

beneficiariesThis theme creates opportunities for enterprise resource planning (ERP) companies such as Totus which has secured 65% of the market share in Brazil’s mid and small cap ERP market. Totus is already the seventh largest ERP platform in the world. It sees itself as the SAP or Oracle of the mid and small cap sector. SPED means that all legitimate retailers are being ‘forced’ to improve their trading platforms to ensure that they can comply and operate with this new system.

Other companies that should benefit from this process of formalisation include well established retailers, such as Renner. This is a fast-growing fashion retailer that stands to benefit from the squeeze on the informal retail clothing sector, such as small shops and markets that currently have a 50% market share. Formalisation is Brazil’s latest theme to offer up new investment ideas – in the wake of the growing middle class, infrastructure opportunities and Brazil’s continued rise to superpower status in energy and agriculture.

A good example of the economic formalisation aimed at raising tax revenues is focused on the B2C transactions. For example, to buy a coffee, the consumer is incentivised to request a stamped receipt from the retailer which is instantly registered at the provincial tax office against the

company. The receipt also includes the customer’s social security number. In return for formalising the transaction, the consumer receives a small percentage of the tax raised from that transaction by way of a cash rebate which is paid into his or her bank account on a quarterly basis. Not only does the government see each transaction but it also sees each consumer, too. Interestingly, this is similar to China’s model which uses an automatic lottery entry for each consumer on each receipt to ensure that the transaction is formalised.

¯rowin¯ middle classAnother interesting theme is the growth of the middle class. It is anticipated another 30 million consumers will move into A, B and C social classes in the next four years. This is bringing advantages across the board and was widely discussed at all company meetings, irrespective of the company sector. With this change comes strong demand for many sectors, some of which are traditionally seen in more mature markets as defensive, such as Energy, Transportation or Leisure.

This growth can be accessed in many ways. I have highlighted Odontoprev – a company from our trip which focuses on the growth of the middle classes over the short term as wages rise, but also over the long term as Brazil’s demographic changes. Odontoprev is just a snapshot of Brazil’s unique investment potential but I hope it has provided a flavour of Brazil’s long-term prospects as a global superpower.

Fraser Blain is Head of Strategic Alliances at Allianz Global Investors.

stock example – OdontoprevBrazil currently has access to the largest number of qualified dental surgeons anywhere in the world with around 11% of the global dental surgeon supply. This over supply has kept dental healthcare insurance in Brazil at the cheapest level in the world with the average cost at only US$7 versus US$70 in the United States (with the United States offering a lower level of cover). There are over 200,000 practicing dentists in Brazil versus around 176,000 in the US. In comparison, 70% of US citizens have medical care versus just 6% of Brazilians.

Brazil has 170 dental schools versus 50 in the US so there is no shortage of a skilled labour force in this area which is beneficial for dental insurers as this should keep prices at a low level. The implementation of a healthcare system for employees is supported by central government as a way of formalising the economy and picking up employee data as well as raising tax revenues. This issue was discussed by the Odontoprev representative as one growth driver.

In addition to working with employers to set up dental healthcare schemes for their employees, Odontoprev is gearing up for growth by working towards distribution/partnership agreements with Brazil’s already-consolidated bank network. This is projected to double their potential market size over the coming years.

This traditionally defensive area has strong short- and medium-term growth characteristics. For example, Odontoprev issued their IPO three years ago at which it raised R$160 million.


Property funds tend to invest either in direct property (buildings) or in listed property equities (such as Real

Estate Investment Trusts). In 2007, HSBC launched the Open Global Property Fund, which invests in both direct property funds and listed property securities funds. In this issue of informer, which has innovation as its theme, I want to explain our thinking behind launching the fund, which is the UK’s first global property fund of funds with daily dealing, designed specifically for UK private investors.

But first I have to wind the clock back. In 2005/06, we had undertaken work to launch a UK commercial property fund. However, by late 2006 we became worried about the level of the UK commercial property market. Annual total returns as recorded by the IPD UK Monthly Index exceeded 20% during 2006 driven mainly by rising capital values as money poured into the commercial property market.

By the end of 2006, initial yields (the ratio of net rental income to capital values) had fallen to 4.6% according to the IPD UK Monthly Index, compared to 7.2% five years earlier. However, whilst investors’ appetite for UK property seemed insatiable at the time, we could not see how investors would

obtain a satisfactory return given how strongly the market had risen. This is a key reason why we decided not to proceed with the launch of that fund.

A new approach was required. Our thinking in launching the HSBC Open Global Property Fund was shaped by three main considerations.

¯lobal, not localWe decided to launch a global fund for two main reasons. There is a strategic case for considering property on a global, rather than purely domestic basis. Property markets tend to be local markets. Rental levels are driven by local demand and supply factors. Relative to listed equity and bond markets, which are highly integrated and strongly correlated with each other, direct property markets tend to be segmented and weakly correlated. This is good for diversification.

There are also tactical benefits from taking a global perspective. No single property market can be expected to deliver the strongest returns at all times. Our concern in 2006/07 that UK returns were going to deteriorate was a major reason behind our decision not to launch a UK-focused fund; we thought other markets offered higher returns.

Dr Guy Morrell explains how a broad approach to property investment offers the HSBC Open Global Property Fund strategic and tactical benefits.

broader horizons

mixture of direct and listed property fundsOur second consideration was to combine different types of property funds (direct and listed) into one composite portfolio. Direct and listed property markets exhibit different performance characteristics, particularly in the short term, and being able to allocate actively across these types of funds offers the prospect of enhancing performance.

As a result, I expect direct and listed funds to fulfil different functions within our fund. Direct property funds tend to be less volatile and weakly correlated with listed assets, but can suffer from poor liquidity in times of stress. Funds that hold listed property, by contrast, offer higher liquidity, albeit with higher volatility. They also provide access to markets in which no suitable direct property funds exist (such as parts of Asia).


HSBC Open Global Property Fund is available through Skandia Investment Solutions.

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HSBC Open Global Property IMA Property Sector

performance of HSBC Open Global Property Fund

fund of funds approachThe final consideration that shaped our fund design was to follow an open architecture approach. It is extremely difficult, if not impossible, for any single organisation to have the specialist investment skills and proximity to the market in every property sector and in the key centres of the world. We therefore adopted a ‘fund of funds’ approach that enables us to select what we consider to be the most appropriate vehicles managed by first-class managers, wherever they may happen to be based. It also means that we can combine different managers and

styles so that the combined portfolio offers more than the individual parts in terms of risk and return.

pro¯ress so farThe fund is approaching its third year anniversary. Whilst the track record is short, returns relative to most other property funds has been strong, as the chart shows.

During this period, we have changed the top-down allocation significantly. At the fund’s launch, we took a very defensive stance. We held no UK direct property funds

and a high allocation to cash, which we later increased as the financial crisis deepened in 2008. This approach helped investment performance and meant that we were unaffected by the liquidity problems that hurt some property funds during this time.

By early 2009, we had increased the allocation to listed property funds to between 65% to 70% for two reasons. First, following significant market falls we felt that listed property offered attractive prospective returns as the major REITs and property companies had repaired their balance sheets. Second, they offered high liquidity. The market rallied strongly, with the FTSE EPRA/NAREIT Global Index delivering a total return of 74.3% in sterling times over the 12 months from the end of March 2009.

In the middle of 2009, we entered the UK direct property market for the first time. Following falls in capital values of 44% between June 2007 and June 2009, we felt that the outlook had improved significantly as yields had become more attractive, rising from 4.6% to 7.9% over this period, according to the IPD UK Monthly Index. UK direct property funds represented just under half of our portfolio at the end of August 2010.

summaryThe HSBC Open Global Property Fund offers a unique and attractive combination of features to investors: exposure to property on a global basis in a daily-dealt fund, blending both direct and listed property through a ‘fund of funds’ for which we select specialist managers. During a period of unparalleled volatility the fund has delivered top decile performance since inception relative to other funds within the IMA Property Sector due to a combination of top-down asset allocation and manager selection. Having established a strong track record, we are delighted that the fund is now available through Skandia Investment Solutions.

Dr Guy Morrell is Head of MultiManager at HSBC Global Asset Management (UK) Limited.

Source: Lipper, Investment Management Association. Past performance is not a guide to future performance.


Inflation or deflation? The debate remains finely poised and the outcome extremely uncertain. Rarely has it been more

important to ensure a flexible approach to investment in fixed income. A quick glance at recent performance tells the story (see chart 1). High yield bonds fell 25% in 2008, only to bounce back to a staggering 49% in 2009. Compare that to the usually dependable Gilt sector, which delivered a negative return in 2009, and you quickly see that getting your asset allocation right within fixed income can have a massive bearing on client returns.

The Fidelity Strategic Bond Fund seeks to outperform all the key bond sectors, including the average IMA gilt, corporate bond, and high yield returns, over the course of a market cycle. The investment approach focuses on utilising a mix of diversified and non-correlated strategies, providing a degree of protection in times of market downturn as well as access to the parts of the bond market offering the

best opportunities for growth. As such, it is designed to be a core holding in client fixed income portfolios.

flexibility to deliverOur starting point is a risk-efficient asset allocation of 20% gilts, 60% investment grade and 20% high yield. Our analysis shows that this 20/60/20 combination delivers a risk profile similar to gilts with a higher return profile similar to investment grade corporate bonds.

During the course of the cycle, a tactical asset allocation overlay is used to adjust the positioning of the fund. During the credit crunch, for example, the fund’s government bond exposure was raised to 70% to protect investors from the worst of the downturn. As a result, from October 2008 to end March 2009, the fund’s total return fell just 1.4% vs the average fund in the sector which fell by 17.5%**. Subsequently, exposure to corporate bonds was increased to reflect the

Howard Fryer explains the benefits of allocating across fixed income in an uncertain landscape

The outlook is very uncertain. We continue our strategy of looking to add performance without taking on undue risk. Active management across fixed income asset classes is important to finding value in these markets. Ian Spreadbury. Portfolio Manager

“

”8.349.1-25.4-0.15.86.6High Yield

51.5

5.7

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4.337.47.47.12.2Best to Worst

6.82.87.31.68.7Inflation Linked

11.1-9.8-0.2-0.76.7Investment Grade10.312.03.0-1.37.1Gilts

2010*2008200720062005

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11.1-9.8-0.2-0.76.7Investment Grade

10.312.03.0-1.37.1Gilts

2010*2008200720062005

Source: Morningstar Workstation. Basis: bid to bid, net income reinvested in GBP at basic taxpayer rate, *to 31 August 2010.

chart 1 – IMA avera¯e annual sector returns (%)


attractive opportunities in both investment grade and high yield credits.

Flexibility in portfolio management is a great asset, but one should never lose sight of the fact that a key reason to invest in a bond fund is to provide diversification. There has been a deliberate effort to ensure the Strategic Bond Fund does not stray into the realms of significant high yield or other types of quasi-equity exposure. For that reason, we never intend to have more than 50% invested in high yield assets. Indeed, as chart 2 above shows, we have made full use of the flexibility in the fund’s objective, without needing to come close to that 50% level.

This is important because, unlike many other strategic funds, Fidelity Strategic Bond has delivered performance that gives true diversification from equities – this, after all, is what many investors are looking for from their fixed income investments.

proven experience

Ian Spreadbury has 30 years of fixed income investment experience and has been the portfolio manager of Fidelity

Strategic Bond Fund since launch in 2005. The market uncertainty and wide ranging nature of a strategic bond fund, makes it more important than ever to invest with a manager who has been through as many credit cycles as possible. Ian is supported by 23 credit and quantitative research analysts and 13 specialist traders as well as Fidelity’s formidable global fixed income resources.

The fund has been well and truly road-tested during the market volatility of the last five years. Since launch it has delivered exceptional returns, outperforming 98% of competitor funds. In addition, the fund has paid out a consistent monthly income over the last five years, as you might expect given its broad based investment approach.

Free from fixed income asset class constraints, we believe the fund demonstrates the value of a highly flexible approach to investing – profiting from wherever bond markets offer the best value through the economic cycle.

Howard Fryer is Sales Director at Fidelity Investment Managers.

The Fidelity Strategic Bond Fund is available through Skandia Investment Solutions.

20% High Yield

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0Fidelity Strategic

BondIMA £ Strategic

BondIMA UK Gilt IMA £ High

YieldIMA £ Corporate

Bond

% 3yrs ann. Return % 3yrs ann. Volatility

chart 2 – Fidelity Strate¯ic Bond Fund: active asset allocation

chart 3 – market leadin¯ returns with lower volatility

Source: Fidelity to 31 August 2010. As % of total net assets (fund split excludes effect of derivatives). Non-rated bonds are allocated 50% to investment grade and 50% to high yield. For illustrative purposes only.

Source: Fidelity and Morningstar on a bid to bid basis with net income reinvested to 31 August 2010. Launch date of Fidelity Strategic Bond Fund: 18 April 2005, sector is IMA UK Strategic Bond. Past performance is not a guide to the future.

** Source: Fidelity and Morningstar from 1 October 2008 to 31 March 2009. Past performance is not a guide to the future. October 2010 informer 19

The performance figures include all external fund management fees and (for Skandia Life and Royal Skandia funds) the life company’s Annual Management Charge, but do not include any other product charges. All Skandia products are subject to their own charges as well as those reflected in the unit prices. Fund performance figures shown are not therefore an indication of the performance of any particular product.

For MultISA, the performance does not allow for tax reclaims that have been available at various times in the past.

For Skandia Life and Royal Skandia funds invested in unit trusts or OEICs, the performance of the Skandia fund will not mirror the performance of the underlying fund because of product charges, taxation adjustments (where appropriate) and the life company investment process.

Where a fund invests in securities designated in a different currency to the fund, or where an underlying fund is denominated in a different currency, investments may rise and fall purely as a result of exchange rate fluctuations.

Special risks apply to emerging market funds in addition to the normal risks of investing in securities. Their prices may fluctuate considerably, and local dealing restrictions may make some securities illiquid. Investment in these funds should be regarded as long-term in nature and is only suitable for investors who understand the risks involved.

The inclusion of any particular fund in informer does not imply that it is suitable for a particular investor. Skandia does not provide advice on selecting investments – investors should consult their financial adviser on the merits of any particular investment.

The Financial Express sourced information is provided to you by Skandia UK Group and is used at your own risk. Financial Express takes care to ensure that the information provided is correct. Neither Financial Express Limited nor Skandia UK Group warrant, represent or guarantee the contents of the information, nor do they accept any responsibility for error, inaccuracies, omissions or any inconsistencies herein.

Unit prices may fall as well as rise.

You should note that past performance is not a guide to future performance.

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