Alternative Assets - Cazenove MM Diversity

Imnoexpert_2

I wonder if someone can help.

One of my advisers has included the Cazenove fund above in suggested portfolios he is putting forward to replace an existing portfolio and I have been comparing it to other similar funds in the 20/60 mixed investment category. For example the Investec Cautious managed fund (which he is suggesting selling).

I noticed that one big difference is that the Cazenove fund has some 25% invested in 'Alternative Assets' (are these derivatives?).

This bugs me because it makes the overall portfolio asset allocation difficult to quantify, but I suppose more importantly what is the effect of having these Alternative Assets, and is it a good thing (for me) and I guess should I ignore advice and keep the Investec fund?

Hope this makes sense and someone can kindly spend some time educating me on this. If so thanks in anticipation.

I really am no expert!

Jegersmart

I don't know much about this fund, althouhg it is a fund of funds....i.e. they invest in other funds for you. The TER is 1.8% which would not put me off the right fund personally, however there is a 5% exit charge.

Is there any particular reason he is suggesting this fund?

J

JohnRo

Perhaps give a better indication what your existing portfolio contains and why the adviser is seeking to replace or change it.

There are many knowledgeable people on here who give a good amount of their time to addressing such matters but they'll probably need more information than you've given to do so.

Imnoexpert_2

I really waned to know what 'Alternative Assets' means, and if a fund that holds money in them is riskier/less risky, and why they invest in these.

I'm looking at portfolios and trying to calculate their asset allocation for myself (portfolio theory says this is what accounts for most of performance). When I try to do this for the portfolios put forward by my IFA I get the answer that around 20% is defined as 'other'

I used the examples in the original post because the funds are in the same sector and the Cazenove one was a good example.

I didn't want to confuse things by detailing the whole portfolio. The adviser would say that the portfolio is a balanced one and that the constituents are put together by his firms investment panel to meet FSA guidelines to be suitable for my indicated level of risk.

Hope this helps.

bowlhead99

Bit of an essay answer as I'm off work this morning...

"Alternative assets" are basically anything that is an alternative to the traditional investment universe of buying public equities and bonds for a period of time and then selling them. This could include funds focussed on private equities (non-listed companies), hedge funds, real estate, commodities, you name it. It's not a very tight definition and the idea of anything ''alternative'' is considered to be higher risk because less people understand it, it's less likely to mirror exactly the performance of the main markets, and also may be more volatile due to illiquid holdings, complex derivative contracts, gearing/leverage, etc.

To take just one of those, for example hedge funds, this is a wide definition encompassing a lot of products. Simplistically, I assume the reason hedge funds are called hedge funds is because most of them are set up with the intention of producing an absolute return over a time period, and not necessarily one which is correlated with movements in the public markets - thus 'hedging your bets'. They can do this by selling stocks short (profiting in a declining market) or by using complex currency contracts so that, for example, a gain on some shares trading in yen does not disappear when converted back to pounds after the yen has tanked.

So if your multi-manager diverse fund has a 20% exposure to alternatives, this is basically a pot of "other" which doesn't fit neatly into the main categories of pigeon-holes which you are putting the rest of your portfolio into, and you therefore can't monitor easily. Assuming the rest of the portfolio is balanced, like your IFA has told you it is, it doesn't really matter that you can't track it. Just balance the 95% which makes up the rest of the portfolio and accept that some of the assets which were suggested as a replacement for your '20-60 mixed' category is, erm... mixed!

A focus on alternatives means that when markets are generally good, you should still make gains but not necessarily 100% of the gains, and losses when the world is slumping but hopefully not as severe - because your holdings are by design, less correlated with a standard investment style and there is a chunk of it devoted to getting an absolute return rather than a specific percentage of whatever the FTSE indices deliver. The 'high risk' perception of alternatives can be misleading and is not necessarily something to be scared of, as what it really means is you are seeking out more of the global investment opportunities than you would have been able to access by simply buying an average basket of UK shares and holding them.

A quick google of the fund name tells me: its larger holdings include Majedie Tortoise (a long/short equities fund aiming for a long-term total return while preserving capital), Jupiter Absolute Return (seeks to generate an absolute return irrespective of market conditions, including holding real equities and equity linked derivatives (including short positions), fixed interest, forex, etc). Cazenove Absolute Target is another one. Then there are other specialist funds like Fidelity and Investec's "special situations" funds which can also use derivatives and are looking for, basically, "attractive opportunities" in equity markets. There is also exposure to funds with focuses in Europe, the US and Japan - income funds as well as equities funds.

Hope this gives you a flavour. Without knowing what's in your portfolio and what you really want out of life, it's not for us to say whether it's right for you, but I would probably have something like that in mine.

Should you ignore the advice? Remember the IFA is being paid to construct a portfolio which meets your needs . If your 'need' is not simply to get a well balanced portfolio but one that you can micromanage, being able to classify every pound into an exposure to a specific share on a specific stock exchange, so you can take frequent decisions based on that without involving a professional, then feel free to do your own thing.

It's good to question and challenge advisors. If yours is a dumb salesman and could not articulate the above, consider whether you should keep him. However, I suspect you just didn't question him enough. If his panel agreed he can propose this investment to you, and it broadly fits in with the other investment choices, they are probably comfortable they won't get sued if the fund does badly. So that's some comfort. Of course, you can tell him you refuse to have a fund containing 20% "other" and he will find something else, but remember he is looking at his preferred investment options for a given investor profile and you are looking at your Investec Cautious with a sentimental "if it aint too broke, why fix it" attitude - completely understandable but I hope the third party viewpoint helps you see it.

Here's a citywire article which may be of interest. http://citywire.co.uk/money/citywire-selection-watchlist-cazenove-multi-manager-diversity/a585976

Imnoexpert_2

Bowlhead thanks for this. I really appreciate it.

I was lucky you were off work as this was the kind of reply I had hoped for. I will be challenging my adviser who is lovely chap and won't mind at all.

If 5% of the portfolio (the total of the investment) was in these I wouldn't worry, or if it was just one fund. In fact of the whole sum to be invested 23% is 'other', 8% 'undisclosed' and 9% 'money market' by asset class.

I have taken the figures from the advisers print from FE analytics. Maybe this doesn't drill down enough?

I take your point about micro managing - and my purpose in looking at the overall asset allocation and sector and regional allocation too was to stop myself having to look at the individual funds (15 of them) (because who knows if fund a will beat fund b) and just see if I could understand the overall strategy.

Now I ask, should I be comfortable with 31% of this pot as alternatives?

David

bowlhead99

Imnoexpert wrote: »

I take your point about micro managing - and my purpose in looking at the overall asset allocation and sector and regional allocation too was to stop myself having to look at the individual funds (15 of them) (because who knows if fund a will beat fund b) and just see if I could understand the overall strategy.

Firstly you're right that "who knows if fund A will beat fund B" is a problem. And arguably, if fund A does happen to beat fund B by getting 20% return instead of 10% in one particular year, that doesn't mean it was right for your needs other than by pure fluke. For example if it has a 50% chance of gaining 20% and 50% of losing 20%, it'll return nil on average with plenty of volatility. Whereas fund B might have a max return of 12% and a minimum of 8%, and delivered its 10% average for you perfectly. The headlines were that fund A 'won': but as it unwittingly exposed you to losing a fifth of your investment, which it only avoided due to some good times in equity markets in the last week of the year, it might be a terrible choice for any other non-fluke years if your portfolio isn't balanced appropriately around it.

I digress. But given you are the type of investor who cares two hoots about what they're investing in (many are not so hungry for information): to be honest, reading up on the strategies of the 15 funds - and, for those which are multimanager or "fund-of-funds" like Cazenove Diversity, looking at some of the underlying funds they're exposed to - will give you a much greater insight into what your fund managers are doing, what themes drive them and how they might perform in certain types of markets, than your alternative.

I suppose it could be comforting to plug the numbers into some sort of global heatmap tool and see you seem to have exposure to a variety of types of stocks and bonds in most parts of the world, a bit high in the US, a bit low in commodities, whatever. But you don't really know what percentage you should have in every sector in every type of security in every part of the world anyway. And arguably there are no right answers. Example, you have a target return of growing your pot by 6% and don't mind taking a loss. Plan one invests half in equities with Manager A who invests in emerging growth stocks targeting 11%, and keeps the other half in Manager B's money market at 1% ; Plan two invests with Manager C who plans to get growth of 6% and manager D who targets dividends of 6%. Plan three invests in E&F, long/short hedge funds which aim for an absolute return of 6%.

All of these might achieve your 6%, might have similar track records over time, but look completely different on a 'fund x-ray' tool. You can get your "some understanding of overall strategy" using this tool but once you have plugged in 15 funds on top of each other it gets pretty busy-looking and complicated, no?

Imnoexpert wrote: »

Now I ask, should I be comfortable with 31% of this pot as alternatives?

The following two paragraphs should be the first thing anyone is told when asking a question here about their advisor's portfolio recommendations:

What you are comfortable with, is not for us to tell you. Why you should be comfortable with it, is what your adviser should advise you.

It's great to have some validation that your advisory fee is well spent, by asking internet strangers on a forum this. But frankly most of them (self included) are not professionals, and none of them (self included) take on any personal risk from answering with well-intentioned utter garbage, competent-sounding garbage, personal bias, malicious intent, or factually correct information which is completely inappropriate for your needs.

My suggestion, if you want to try and get your head around it - simply plug the 69% into your tool and see how it stacks up with what you would be looking for in the full portfolio - then ask questions to your advisor about how these omissions or overweights or underweights are balanced, if at all, by the remainder you haven't analysed.

Example, "hey, I seem to have 9/69ths of my portfolio in money markets at what I assume is a low yield, and there's not much in south america which I hear is a fast growing economy. I hope some of the 'other' has got more equity exposure and something a bit more spicy??" ; "Don't worry sir, some of that 'other' is in the listed private equity sector, and a couple of the underlying funds in that 'undisclosed' multimanager have a penchant for latin american real estate, blah blah etc" ; "oh OK, but I usually see some of my cautious equity managers doing xyz for some downside protection??" ; "Yes that's what the absolute return funds give you, blah blah".

If your guy advising you is indeed a lovely chap, just have a conversation like this. Although on behalf of the other lovely advisors out there, if he appears competent, try to stop short of telling him how to do his own job, unless you're paying him plenty.

I guess it's like going to a gym and the personal trainer gives you his ideal training regime which is all free weights instead of machines, and they don't have a treadmill.

"But i always use the leg press machine! How will I get buns of steel now!?" ; "Squats sir, builds your core and stabilizer muscles too" ; "Oh, well what about my cardio, there's no treadmill!" ; "Sir we have these bike things, and rowers, they're all lower impact on your joints, and you could of course jog round the park absolutely free if you really want to run, would save you the hassle of getting the bus here sometimes".

Only if you ask the gym guy what to do in the 31% of time dedicated to Other, and he says, "I don't know I'm just a salesman, I copied the idea off my mate over there, gives me a break and some easy money for nothing", should you rightly tell him to shove it.

Imnoexpert_2

Thanks again for your reply. I think you and I share a lot of views and attitudes about the world of saving and investment.

I think your point about it being up to me to say if I am comfortable with an investment is very well made. In a way by posting here I think I'm demonstrating to myself that I'm not - or at least not yet. I need to talk to my adviser and see if he can reassure me.

With regard to internet forums I think my 'radar' is pretty good at picking out the useful comments from the others. I do like to hear other views though because it helps me form my own opinion and gives me issues I can 'challenge' (in the nicest possible way) my adviser with. I am aware too that there is a lot I just do not understand and there are people here who have knowledge I don't.

Your comments too illustrated my difficulty that I am paying an adviser who while, as I said is a very nice chap, ultimately has to say 'this is my advice , its in good faith but it's up to you chum'.

I am also getting the answer "Because of the way we are regulated these decisions are made at head office by the equity partners of the firm who are experts in their field and have put together standard portfolios for your level of risk " which I don't like much.

Regards

bowlhead99

Imnoexpert wrote: »

Your comments too illustrated my difficulty that I am paying an adviser who while, as I said is a very nice chap, ultimately has to say 'this is my advice , its in good faith but it's up to you chum'.

I am also getting the answer "Because of the way we are regulated these decisions are made at head office by the equity partners of the firm who are experts in their field and have put together standard portfolios for your level of risk " which I don't like much.

1) One presumes the equity partners have an appropriate level of professional training and more importantly personal and professional expertise and experience, to construct a suitable portfolio that fits their view of the current market, for a given level of risk tolerance and goals, and which is not uncompetitively expensive in terms of TER. If you doubt their capability in this, find someone else.

2) With a full set of off-the-shelf portfolios available, the only real job for the "very nice chap" face-to-face adviser to do is assess your level of risk tolerance and goals, and give you enough basic information for you to make a judgement call, without necessarily showing you how to pass the IFA exams yourself. If you doubt their capability in this, find someone else.

Although I mentioned in an earlier post that it's for them to convince you to take the product, rather than for us to tell you to take the product, the fact that they have not thrown in a lifetime's worth of education to help you make your decision is arguably not a failing.

Consider how much you are paying for the advice. It sounds a bit like what you really want is to learn how and why they made every specific decision to include each specific weighting of each specific fund in your portfolio. Will you then use your newfound knowledge to actively monitor the portfolio and make decisions on your own to rebalance the portfolio as your preferences change and market conditions change, without further advice?

If "yes", one could contend that actually, for the odd percent commission or few hundred pounds fee, they don't actually owe you their lifetime of education and experience, and the guy doing the face to face discussions with you does not need to be a good teacher - they simply need to fulfil points (1) and (2) above in understanding your risk tolerance and having an appropriate cost efficient portfolio ready to go as of now.

If "no", you'll leave the portfolio construction and ongoing rebalancing to professionals, it's arguable that you are making a fuss over nothing and they simply need to have fulfilled points (1) and (2) above.

I'm sure the IFAs on this site will weigh in if necessary in terms of the purpose of specific funds or whatever, but at the end of the day it's all up to you whether you want your current IFA's advice or, based on what you've heard, would prefer to go and buy somebody else's.

grey_gym_sock

I am also getting the answer "Because of the way we are regulated these decisions are made at head office by the equity partners of the firm who are experts in their field and have put together standard portfolios for your level of risk "

it may be fine for those decisions to be made at head office, but surely your advisor should be able to explain the rationale behind them.

In fact of the whole sum to be invested 23% is 'other', 8% 'undisclosed' and 9% 'money market' by asset class.

'other' and 'undisclosed' could be almost anything - so might or might not be higher risk. just suggests missing info.

'money market' is cash on deposit. one might question why you need fund managers to put cash on deposit (and it won't get FSCS deposit protection). but perhaps it's a temporary thing, before they put it into something else.

it's a matter of opinion, but i don't like "absolute return" funds. they use various strategies which seem far too risky (shorting equities; betting on currencies or commodities). if you don't want all your capital exposed to swings in equity markets, then i'd look to diversify into either property (probably the highest return outside equities) or index-linked or fixed-rate bonds/gilts (generally lower-return, but providing some ballast).

Imnoexpert_2

Interesting replies.

While taking the point that providing the advisers are qualified and that my risk is established correctly my decision is to either trust them to do their job or go elsewhere Bowlhead I think I tend to agree with Grey Gym Sock on this.

For me that decision to 'take on trust' is a hard one to make -. I have actually done this in the past (Equitable Life, With Profits funds, Endowment Mortgages, and some pretty average pension funds spring to mind). I seek not to micro-manage or get too involved with each individual fund, more to understand the strategy and how the parts contribute to the strategy.

My adviser needs to try harder to win my trust (I accept that they will have to do more to gain it from me than from others where a firm handshake, shiny shoes a nice suit and the use of some esoteric phrases may do the job). However I think that what I need is not outside what I would consider a normal sales process for these services.

The issue of cost is a good one - and another can of worms. Perhaps I ought to work out how much I am paying for this across the range of investments the adviser manages for me? Maybe I'll ask him to provide this in £ and pence. At the end of the day though it's his choice how much work he wants to do to get/keep the business.