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ii Super 60 methodology

ii Super 60 Methodology

Overview

This document confirms how we choose our Super 60 investments, who is involved in their selection, our own bespoke asset grouping, the analysis and selection process and finally, the monitoring process. 

Unlike most rated lists, which include only actively managed funds, our list includes both active and passive options, it also looks at the whole spectrum of collective investments, including funds, investment trusts and ETFs. 

Our rated funds are designed to be suitable for all investors, irrespective of experience. The matrix of 15 x 5 asset groups and investment categories acts as a convenient short list of potential investment options for investors who are interested in a particular asset class and investment style. Our objective is to provide a menu of high quality choices among the available investments across a broad variety of markets and investment types. 

Our flat-fee pricing means that our investors do not have to have any concerns about any vested interests of ii. Investments are only included if they are, in our opinion, the best option for you, and we do not make exceptions. This ensures that customers can have full faith in our recommendations since there are no commercial or other hidden motives for our lists. The selection process is underpinned by the key principles of Transparency, Choice and Fairness. 
 

Asset Groups and Investment Categories

We have created clearly defined, easily understandable asset class groups and investment categories within which investments can be categorised. This aims to clarify the choices available to private investors.

Our 15 asset groups include some dedicated to UK investments; UK growth, UK equity income, UK smaller companies and sterling bonds. Others include broad global investment options; global growth, global equity income, global bonds and property. For those seeking specific regional exposure to equities we have asset groups dedicated to Emerging Markets, Asia, Europe, Japan and the US. There is also a specialist group, which includes commodities. Finally for those seeking a more diversified investment strategy we have a mixed asset group.

Within each asset group there are five possible investment categories: low cost, core, income, smaller company and adventurous.  Each category is briefly explained within the table below and has a different meaning depending on whether the relevant asset group is equity or fixed income.

Our objective is to limit the total number of funds to around 60 at any one time. The UK and global equity categories offer a larger number of fund options and the alternative asset groups fewer, reflecting typical customer demand as well as the range of funds available. The alternative asset groups and the adventurous investment category are designed to appeal to the more expert investor.  

Selection Process

Our fund selection process has seven key elements as summarised in the diagram below, following which each element is explained in more detail: 

Initial screening

We look at all available tradeable options in the selection process for our rated list. Using various filtering criteria, detailed below, we generate a universe of viable funds for full review and discussion.

Investment Filters

  • Must be tradeable on our platform 
  • Exclude funds that are either sub-scale or experiencing capacity issues 
  • Must be liquid and allow daily dealing
  • GBP version chosen where possible and suitable: unhedged share classes are usually preferred1  meaning investors may be exposed to currency risk
  • Minimum track record of one year - preferably three
     

Cost assessment

We next assess the charging structure of each fund in the universe to ensure that it provides reasonable value for money. 

Cost Filters

  • We typically avoid investments where there is an initial charge
  • The Ongoing Charges Figure (OCF) must be reasonable and not significantly higher than its peer group average. 
  • The cheapest share class available is chosen where more than one class exists
     

Performance analysis

Performance is analysed over both short and longer time periods, to identify those active funds and trusts that have delivered consistently superior returns compared with their relevant peer groups. In the case of passive funds however, the key performance indicator is tracking error versus the relevant market index – the tighter, the better. This ensures that these investments provide exactly what they say on the tin.

Final constituents are typically selected because they have delivered consistently superior returns (or lower tracking errors in the case of passive funds) compared with their relevant peer group. However, the list may occasionally include a few deliberately 'contrarian' choices where the investment style pursued by the manager has not been in favour, but where we believe past performance and/or the current investing environment suggest a change in fortunes may be due.
 

Risk profiling

Outsized historical returns are sometimes generated by managers who take inappropriately high risks. Hence we quantitatively analyse the risk profile of all candidates using various metrics including Sharpe ratios, information ratios, volatility, tracking errors and gearing where applicable. Investments with poor risk characteristics relative to peers are eliminated. Consequently the rating process is focussed on identifying those managers who are able to deliver the strongest risk-adjusted returns.
 

Qualitative assessment

In addition to analysing historical performance data, investments are also subjected to qualitative due diligence. Factors taken into consideration include manager track record and yields, where relevant, plus dealing spreads and share price discount or premium to underlying asset value for investment trusts. 

Depending on the asset class, we examine specific fund characteristics: for example within equity funds we look for any significant style drift, while within bond funds the credit profile of holdings and duration of portfolio are considered. 

Qualitative analysis allows us to look in more detail at the how the investment is actually run by the manager. We look into the how fund manager firm operates, its reputation, management team experience, investment style and process. 

In addition to our own due diligence we use analysis from our data providers, Financial Express (Trustnet) and Morningstar, where this is available. This allows us to consider external reviews and ratings of the investments as well as our own in-house assessment. 
 

Selection and approval 

By this point in the process we will have distilled the original investment universe down to around 260 high quality funds, investment trusts and ETFs2. From this shortlist we now identify a final 60 investments that we believe to be the most suitable candidates for the 15x5 matrix of asset groups and investment categories that were described above.

The final ‘Super 60’ list is brought for discussion and approval at a Selection Committee made up of internal experts from interactive investor, Money Observer and Moneywise. The committee will also engage with other investment experts as required. 

The process, selection and ongoing management of the Super 60 is also monitored and ratified by the Investment Committee of ii.
 

Review and refresh

We maintain regular contact with the management companies of all investments on the Super 60 recommended list, to ensure that each selection continues to be managed in line with our expectations. In particular a detailed fund questionnaire is completed each year for each Super 60 investment, covering all the key areas of our due diligence process and based on information sourced directly from the management company concerned.

The Super 60 list is monitored continuously for ‘red flag’ events. Examples of such events include, but are not limited to, fund manager moves, soft closures or a major re-rating from external or internal sources. Investments which have experienced a red flag event are automatically placed under formal review.

In addition, the Selection Committee meets monthly to monitor the performance of the Super 60, based on quartile rankings over multiple periods. Inevitably, Investments have periods of out and under performance, but this approach aims to identify those that are struggling for fundamental reasons rather than temporary tactical reasons. Key risk indicators such as volatility and Sharpe Ratio are also monitored, to help us identify any funds whose risk-adjusted returns have been deteriorating. Passive options have their tracking error and performance reviewed to ensure they are still meeting their index objectives. Investment trusts trading at a high discount or premium to net asset value will also be highlighted.

Any Super 60 investments identified as a possible concern as a result of this monthly performance review will become subject to enhanced monitoring. If the situation does not improve such that we begin to suspect an underlying problem with the investment, it is then placed under formal review.

Once a Super 60 investment has been placed under formal review, either for performance reasons or because of a red flag event, our analysts will conduct a thorough investigation, usually including an interview with the investment manager. Based on their report, the Selection Committee will make a recommendation to the Investment Committee either to retain or replace the fund within the Super 60 listing. Our goal is to reach a decision one way or another within three months of the date when the investment was placed under formal review. This gives us enough time to discuss our concern with the relevant fund manager and/or allow an opportunity for improvement. Customers will be advised immediately via the ii website when any investment has been placed under formal review, and again when its fate has been decided.

Where a investment is removed from the Super 60 list, we will usually seek to replace it with a new option in the same asset group, unless we believe that there is still a sufficient choice for investors within that asset group. The shortlist of 260 investments mentioned above acts as a 'substitute bench' for the Super 60, ensuring that replacements can be made promptly.

On a quarterly basis, the Selection Committee undertakes a full review to discuss all investments on the list and to consider if any changes should be made. We also look at potential alternatives and market events that might make changes appropriate. Any recommendation for change is then discussed, agreed and ratified by the Investment Committee.

Any changes that are made will be listed on the site, along with a rationale for the change. A quarterly update of the list will be part of our regular editorial features, which will also include a list of all changes made during the quarter. 

Once a year we repeat the entire selection process described above, beginning with a refresh of the entire universe of tradeable investment options and then working through the subsequent five steps that result in a final set of 60 rated investments. This ‘clean sheet’ approach ensures that we consider any new fund offerings and significant market events so that our list remains fresh. The danger with simply maintaining rated lists and not ever adopting a full review of the universe is that you might keep less attractive investments on the list for longer and miss good new opportunities.

Please note that in spite of these measures to replace and refresh we do not anticipate a high rate of turnover, with the majority of funds expected to retain their Super 60 rating over several years. This is consistent with our aim of selecting investments that should be suitable for long term investment purposes.
 

Are these recommendations?

No, as an execution only provider we do not provide advice involving personal recommendations. Our objective is to develop a trustworthy shortlist of rated investments from which our customers can choose their own investments. 

In our experience, individual investors tend to have product type(s) they prefer, be they ETFs, funds or investment trusts, or to be primarily active or passive investors. Where possible, we try to include attractive options in each of these categories.

The Super 60 section of the ii website includes explanatory information on each asset group and investment category. Factsheets for each of the funds and trusts are updated regularly. They contain current performance and valuation metrics, as well as key statistics to help investors make their own judgements. 

The Super 60 rated fund list is for information and discussion purposes only and does not form a personal recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in the rated investment list may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

1The exception is global bonds, where hedging allows you to take pure credit risk in GBP by eliminating the FX risk, thereby improving the protection characteristics of this particular asset in a broader customer portfolio.

2These 260 funds are published by the Money Observer magazine as their set of Rated Investments.