Cazenove Portfolio Management Service webcast

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June 2012

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Cazenove Portfolio Management Service webcast Marcus Brookes, Head of Multi-Manager Nick Georgiadis, Head of Intermediaries Host: Robin Minter-Kemp, Director, Investment Funds

Robin Minter-Kemp: Good morning, and welcome to Cazenove Capital. My name is Robert Minter-Kemp and I’m here today to introduce Marcus Brookes and Nick Georgiadis, who will be talking about the key merits of the Cazenove Portfolio Management service. Many of you will be familiar with the format of today, we’ll be taking questions at the end of the presentation but during the presentation please feel free to add and type in questions as and when. The service was launched back in April of this year, really to provide and highlight the gateway into all levels of wealth management service capability here at Cazenove Capital. Overall the service provides an outcome based solution after thorough risk assessment based on your clients’ needs and meeting their expectations. Although distinctly different propositions, they both share common values in providing expertise and pricing or competitive pricing and of course fund research which is shared across the fund business as well as the wealth management business as well. And we always aspire to achieve and maintain future performance in line with your clients’ expectations. The key segregation of the propositions really comes down to differentiating what your clients’ priorities are. At the minimum access funding level, you can recommend a number of attitude to risk rated multi-asset and multimanager funds. Not only are these

priced at 0.5%*, but all are offered within Distribution Technology’s (DT) planning tool, between one and ten. Of course, Distribution Technology is one of the leading providers in providing a profile of between four and eight, starting with the low to medium profile which is the diversity portfolio, which of course you are very used to offering to your clients, both in terms of income and of course the flagship portfolio. At the higher level, £250,000 onwards, your clients will qualify for a tailored bespoke service. All of this of course is underpinned by the process of, in terms of providing added value for research, portfolio construction, and as I say, fund research which we utilise across the private wealth business and of course the funded business. At this point, I’m looking to hand over to my team who will be introducing both aspects and both key propositions. Marcus Brookes will be the first one. Marcus is known to many of you, he’s one of the leading OBSR rated fund managers within the multi-manager sector, and Nicholas Georgiadis has been with Cazenove Capital for just over thirty years. He’s been one of the longest standing senior directors within the wealth management business and he’s primarily responsible for the intermediary team and offering the service to the advisory market. So without any further ado, let me hand you over to Marcus to take you through key parts of the funded solution.

*0.5% AMC on Class X shares, minimum £1m waived via adviser platform.

Marcus Brookes: Morning everyone. Thanks for dialling in today, and I’m going to just run you through the multi-manager risk profiled funds in this little section of the presentation. So as the slide so clearly says here, we’ve partnered with Distribution Technology to risk grade the multimanager range. They’ve been in existence since 2002. So we’ve got six funds, all independently risk profiled, and they come out at four to eight by Distribution Technology. And we also have the dynamic planning risk profiling tool on our website, so if you want to use that you can actually do it from our website. Now we think that this is a very cost effective route to getting investment solutions that are risk profiled as we say, and also pretty tax efficient as well because obviously it’s all wrapped within an OEIC structure, it’s for capital gains. We also feel that the multi-manager route here is very useful in so far as that it’s got unrestricted access, it is truly unfettered. We can invest in funds all over the world, multiple asset classes, and actually the funds are also very widely available on most platforms already so, and we can use our buying power I should say, we have some £4bn in external funds within Cazenove Capital to really make sure that we keep the cost to you and your clients as low as we possibly can do in constructing what are meant to be efficient risk profiled funds. So moving on to the next slide, this is the fund range that we’ll be, that we do currently manage. So if you look at the dynamic planning tool that has described the Multi-Manager Diversity Fund, which is our most popular fund, it’s over £800 million in size now, that’s come out at a four rating. But also so has the Diversity Income Fund. Now when you look at the asset allocation of these funds you can see that they are multi-asset in nature, they’re very definitely multi-manager as well, we go and outsource the very best fund

June 2012

managers in the world that we can find, but if you look at the asset allocation between them, they are actually slightly different. Which may make you think that why on earth would Distribution Technology give them the same rating? Well, if you look at how the funds have actually performed over time, they’ve actually managed to generate very similar levels of return, very similar levels of volatility and they actually do have the same benchmark, which is to beat CPI. Now the differences between the two funds is that the Income Fund is trying to generate a 4% yield per annum on average, and so far we’ve managed to achieve that, whereas the Diversity Fund is more of a total return fund over time. So, you know, you can, we’ve got two funds that have been labelled a four but there is a distinct difference in the type of return that you’re going to get, although the profile we believe should be maintained over a period of time. Then moving up the risk spectrum, where for additional risk you would expect to get additional reward, you can see that the asset allocation here for the Cazenove Multi-manager Diversity Balanced Fund, which has been rated five, can have an equity exposure between 50 and 85, fixed income and cash between 1 and 50 and alternatives between 1 and 50. You can see all the asset allocations on this slide here, so we get all the way to the Cazenove Multi-manager Global (ex UK) Fund, which is a pure equity fund, and it’s got 90-100% in equities, obviously we’re going to hold some cash alongside that as well. The point I’d like to make about this structure is that you can see from the benchmark that the levels of risk do go up from the benchmark, and I think that the planning tool has adequately described how the funds should behave over time. I’d also like to get across the notion that everything that we do on a multi-

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manager team is applied equally across the funds. So if we find a fantastic UK equity fund, we will put it in the Diversity Fund, the Diversity Income Fund, if it has an income and is appropriate, we’ll put it in Balanced, Tactical, UK Growth and so forth. So this isn’t, these are not individually managed portfolios with a wide variety of risk returns in them, they are very consistently managed by the same team. So the process that we use in managing these portfolios has not changed since the team has been at Cazenove Capital at all. We have always started with the belief that asset allocation is one of the key drivers to returns for clients, and actually also we shouldn’t forget the way that those returns are generated, and we’re very keen on making sure that we minimise the risk for the every unit of reward that we are delivering to our clients, and asset allocation for us is a key tool in delivering those returns. So if we’re going to do asset allocation, choosing which of the multi-asset classes we think will actually make our clients’ money and staying away from those assets we feel will actually lose our clients’ money, we’ve got to get these asset allocations right. So we do use internal resources, we’ve got a very good strategy team here headed by the Chief Investment Officer, Richard Jeffrey, who many of you may have heard on BBC’s Radio 4, he’s often a contributor to that and also national press. We have internal fund managers who sit very close to us so we’re able to go and ask them about how credit markets and European equity markets are behaving and that gives us a real minute by minute feel for what’s going on. Equally important though I must say are the external resources. I do not want to underemphasise how much time we spend talking to the very best fund managers in the world, trying to find out how they manage the fund but also where their views are, where are we going, what’s going to be the outcome of

say the Greek election this weekend and how are people positioned for that ahead of it and also what they might do if their view was wrong. We use lots of broker research, that tends to be pretty good, but we much prefer the independent strategists, who live and die by the recommendations that they make. So the team you can see here, that’s myself, Robin McDonald, Joe Le Jehan and Tabitha Johnston, 47 years combined experience, we’re doing all of this ourselves. Once we’ve formed the asset allocation view, where do we want to go overweight, underweight, do we want any exposure, only then do we go and find the very best fund manager for that allocation. In many cases we think that people spend far too much time looking at which fund, which UK equity fund for instance they should be investing in, when perhaps the first question they should be asking themselves is should they have any UK equity at all. Once we’ve done that we make sure we buy the right amount of the right manager, and then we consistently review it, which is the last bit of our process. So that’s a quick overview of the funds in the risk graded multimanager range and the process that’s used to it. I’d now like to hand you over to Nick Georgiadis who’s going to take you through our discretionary fund management. Nick Georgiadis: Thank you very much Marcus and good morning everybody. I thought I would just start with a look at why you might consider working with discretionary fund managers. So looking at this slide, reduced business risk, what does that actually mean? Essentially advisers do not need to be exposed to investment risk, by choosing to work with a discretionary fund manager, your role becomes helping the client select a discretionary fund manager, helping clients to assess their ongoing performance, and if things

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don’t go well, helping clients select a new discretionary fund manager. You shouldn’t at any point be at risk of losing clients over poor performance. This then allows you more time to focus on your core areas of expertise, be it wealth planning, pension advice, whatever, and also on new business development. Your client then benefits from active day-to-day professional management, we don’t have to worry about writing reason why letters or consulting with clients, we can actively manage portfolios swiftly which I think is particularly important in today’s fast moving markets. We also have accessibility to the more specialised areas of investment which allows us to construct portfolios of a broader range of asset classes, and we also have access to individual investments not normally accessible by retail investors, and we should also have access to institutional pricing, which keeps overall TERs down. And finally we should be able to provide a truly bespoke investment process, admittedly perhaps not everybody does these days but we certainly do. So why would you consider working with Cazenove Capital Management if you have now opted to work with a discretionary fund manager? Well a few points here, firstly independence, we are unusual amongst our peers in so far as we are completely independent, we’re owned primarily by current and former staff, which means essentially that we are not at risk of becoming product pushers for a larger organisation, and also that we can focus on building long-term relationships which are so important in the private client environment. We have a specialist intermediaries team, a team that focuses exclusively on working in partnership with advisers. We’ve been in existence for ten years now so we feel that we have a really good experience at making the relationship work to the best advantage of advisers and

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indeed the underlying clients. And it’s important to us too that we seek to adopt a consistent nationwide approach. And in an age when many DFMs are going down a route that perhaps for them is a little more cost efficient of providing models, we think it’s extremely important to provide an approach where clients, with the help of their advisers, can have input at outset so that we then build portfolios that are truly designed to meet their needs.

communication and the level of communication is something that we will tailor to meet the requirements of the adviser and clients, beyond that, quarterly or six monthly reporting with an online facility giving daily updates of portfolios. But we’re well aware that what is important to client and adviser is continuity of relationships, so that same fund manager will be looking to develop a relationship with both over time.

Once upon a time it just simply wasn’t possible to assess the relative performance of different discretionary managers, but these days through asset risk consultants, there is an organisation now that allows you to assess the relative performance of discretionary managers, and I’m pleased to say that over all periods, one, three and five years and all the risk categories of defensive, of medium, of growth, we have produced a superior performance with lower volatility than the mean. And finally in terms of genuine expertise in specialist areas of investment, that is something that we strongly believe in and our portfolios have considerable investment in areas such as absolute return, including hedge funds which we’ve used in significant proportion in client portfolios for more than ten years now, and the specialist area of capital protected structured products. The overall effect has been to dampen volatility and to improve the consistency of our client portfolios, and this is borne out by the very good risk adjusted returns that asset risk consultants have demonstrated.

And finally just a slightly more detailed look at our investment approach, Marcus has already touched on this, but essentially it’s the same approach but bespoke. We have three starting points for portfolios, of defensive, of intermediate, of growth or aggressive as it’s put on this slide, and you’ll notice in the intermediate or medium risk area that the allocation to equities is relatively low at 43% and an element of that will be provided by capital protected instruments. So today’s exposure directly to equity markets is probably half that of ten years ago and a good deal lower than the mainstream, and this has allowed us to produce these extremely good risk adjusted returns for very low volatility. These are merely a starting point for us and we can fine tune the approach for clients. On the private client floor we’re fortunate to benefit from this rigorous investment process of very professional and experienced analysts and strategists, to which Marcus has already alluded and indeed Marcus’s team is invaluable to us in constructing portfolios, so I’ll now hand back to Marcus.

So a little bit of the logistics really, working with advisers, we ask at outset that an adviser provides us with sufficient information about the background to the client for us to be able to put together an initial proposal, and then we’ll make sure that a fund manager is available to attend an initial review meeting, and that same fund manager will be available for all on-going

MB: Thank you Nick. So this slide hopefully helps you to understand how it is that Nick’s team and my team do work very closely together. The multi-manager team here at Cazenove Capital is responsible for the buy list for the entire firm, so if there is a fund that the multimanager team is using, it’s available to everyone within the firm. And in fact the multi-manager team also put

June 2012

together a buy list that’s far bigger, far wider than just our needs, so if we have an offshore client for instance that cannot buy a Dublin domiciled fund that we actually do like, we will go and find for instance a Luxembourg version of that fund. So we manage the buy list, we make sure that we understand exactly who the fund managers are, we make sure that we’ve got a good spread of assets available to our private client fund managers, our discretionary fund managers and the multimanagers, and we make sure that we do the reviews because often it’s, well we’ve found in the past that the buy and hold strategy that many people adopt has not led to the results that people wanted, and I think a consistent approach to asset allocation, fund selection and then making sure that you review those positions for your client is easily the best way of producing the most consistent risk adjusted return over time. So thank you very much for listening to me, I’ll now hand back to Robin Minter-Kemp. RM-K: Thank you Marcus and thank you Nick. Just before we move on to questions, by way of the last slide, we appreciate that both the propositions that have been talked about today on the wealth management side and on the multimanager side, we appreciate that a lot of what you do in terms of ongoing value added service to your clients, particularly post RDR on 1st January, is about on-going information from us to you. So with that in mind we appreciate that the multi-manager funds our transparency is very key, constant communication from the fund managers, which you can access either directly for the website or accessibility to Marcus and Robin (McDonald, co-manager) who have proved very versatile in the marketing arena, and with that in mind we are always looking at ways of adding value on this side, and you

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will have heard in the press recently about the enhanced reporting that we’re working on in terms of an online tool and provision of a hard copy, more of that as we get to the end of Q3 of this year. On the discretionary fund management side, obviously we can’t be as transparent, bearing in mind how discrete some of the clients of the bespoke ten year portfolios that we provide those clients, having said that, access to dedicated portfolio managers is key to that service and Nick and his team will make sure that happens on an on-going basis. So without any further ado, as we come up to 20 minutes, let’s move onto questions, we have a couple of questions that have come through. The first one is actually around the risk profiled multi-manager funds, particularly with regards to Distribution Technology. The question’s aimed at you Marcus, what happens if Distribution Technology change the risk profile of one of your funds and what implication will it have for you in managing those funds? MB: Okay thank you for that question. This brings to mind a few other points I need to make as well, in so far as that the multi-manager range has been in existence for over ten years, these have not been designed to follow the Distribution Technology (DT) asset allocation at all. If the asset allocation of DT’s risk grading for a four happens to be the same as Diversity or Diversity Income, that is a mere coincidence. The analysis that DT have done on the funds is all about the benchmark and how the funds have performed over time, and therefore the grading that they’re willing to give them, and it’s vital to me and my team that we are given the independence to invest in those assets we think will make our clients’ money and not be forced to invest in assets we feel would actually detract for our clients, so for instance I know a few advisers have expressed some frustration about

the levels of property in the benchmarks. Now with respect to what happens if DT actually change the risk profile of the multi-manager funds, I should say to you straight away that I will do nothing to try and get the risk profile back to where it was, coming back to the fact that I’m trying to beat the benchmark, not trying to stay within the DT risk grading; however we have been through this very subject with DT, we have stress tested the levels of risk that we are likely to be taking in the portfolio, and we are aware that over short periods of time they may well move slightly out of banding, and I mean there is a potential to move a long way out of banding but the history suggests they could move out of banding for relatively short periods of time to the point where DT don’t feel they need to actually move the risk grading. So what happens if DT change the risk profile? We will not do anything, I should reiterate that, but we don’t expect that to happen too much if at all. RM-K: Okay, and leading on from that question to another question, Marcus, why has Diversity Income got a similar risk profile to the Diversity fund, given it does have rather a substantially different objective? MB: Okay, another good question. Diversity Income was borne out of the track record of Cazenove MultiManager Diversity, and we had sort of resisted requests to launch an income version of it for many years, basically because of tax reasons but then it became clear that actually the demand was there and we really want to do this, so we spent a long time trying to work out an asset allocation with an income bias that would manage to produce similar returns to Diversity, so the fact that they’ve come out being very similar to each other in actual reality is no accident, they are actually managed to be pretty close to each other. However, it should be borne in mind

June 2012

that the asset allocations do need to be different and the reason is that effectively the absolute return part of Diversity does not give a yield currently. Now I’m hoping that one day I’ll actually get bullish on property, it’s not yet, but at that point I will be able to get a yield out of an alternative if you like. So for Diversity Income we have a lower exposure to absolute, otherwise we simply wouldn’t be able to deliver on our 4% yield that we’re trying to achieve for our clients. It also does mean that some of the fund holdings are different, in fact there’s quite a bit of difference and indeed the asset allocation may be different, but if you think about the same team managing two different portfolios for the same aim, we are looking at it every day and making sure that any unexpected risk or return is being accounted for an compensated, so they really should be having the

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same DT score in my opinion. RM-K: And the final question for Nick, to what extent does the discretionary fund management services utilise the fund research that’s driven out of Marcus and Robin’s area.

www.cazenovepms.com, so please either contact that directly or your adviser, and thank you for joining us this morning. Good morning.

NG: That’s certainly essential to us. It forms the prime basis of the fund selections within our portfolios. We do have our own investment teams on the private client floor, but we’re not going to try and replicate the very good work that Marcus and his team do, so to answer the question it’s essential to us. RM-K: Thank you. Thank you both for your input this morning, the speakers, and thank you for joining us. In terms of for more information, just to remind you that the portfolio management service that covers both propositions does have a dedicated website at

Regulatory information and risk warnings Issued by Cazenove Capital Management (Cazenove Capital). It is for information purposes only and does not constitute an offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein. This document is solely for the use of professional intermediaries and is not for general public distribution. The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital or connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to change without notice. This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of Cazenove Capital Management and to the extent that it is passed on, care must be taken to ensure this is in the form which accurately reflects the information given here. Unless otherwise indicated, the source for all data is Cazenove Capital. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and may be affected by fluctuations in markets and exchange rates. The information provided (including the Dynamic Planner® and risk profiles) is to assist financial advisers when establishing their clients attitude to risk. The responsibility for assessing the suitability of financial products remains solely with the financial adviser. The provision of this information should not be construed or interpreted that either Cazenove Capital or Distribution Technology are providing financial advice. Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund Management Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA provide investment products and services.

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