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model portfolios methodology

Model Portfolios: Methodology

Summary

 

Introduction

Interactive investor’s objective is to create high-quality model portfolios, designed to help you realise your ultimate financial goals. They are completely transparent, not just in terms of how they are constructed, but also in terms of their cost. They comprise our highest conviction choices across the whole fund universe^, with absolutely no conflict of interest in our fund selection decisions. They are built upon a selection process that has proven itself over many years.

^ We use the term 'fund' to mean any type of collective investment vehicle, including Authorised Unit Trusts, OEICs, ETFs and Investment Trusts.

The ii Model Portfolios are designed, constructed and maintained in accordance with a robust, four-stage process:

Defining investment objectives

The objective of the ii Growth Portfolio (whether Active or Low-Cost) is to maximise investment returns over the long term, by investing primarily in growth assets e.g. equities. The risk-return profile of the ii Growth Portfolio is expected to be consistent with an asset allocation to global equities of between 80% and 100%.

The objective of the ii Income Portfolio (whether Active or Low-Cost) is to focus on income generation as well as investment returns over the long term, by investing primarily in income assets e.g. dividend-paying equities. The risk-return profile of the ii Income Portfolio is expected to be consistent with an asset allocation to global equities of between 80% and 100%.

  • The Active Portfolios are constructed using active (non-index) funds and trusts, which have the potential to outperform the market, but at a higher annual cost.
  • The Low-Cost Portfolios are constructed using index-tracking funds, including exchange traded funds, with low annual charges.
     

Optimising the asset classes

We then looked at the broad mix of asset classes that should be represented in the portfolio in order to give it the best chance of achieving its stated investment objective.

The optimal mix of asset classes for any model portfolio constitutes its ‘strategic benchmark’. The strategic benchmark is re-optimised on an annual basis to take account of any changes to our long-term assumptions about the return or risk expectations for the individual asset classes. Each model portfolio is then rebalanced on a quarterly basis so as to follow its strategic benchmark as closely as is reasonably possible while at the same time minimising costs of rebalancing.

Current Benchmark (for all portfolios)

Asset Class Optimal Weight
UK Equities 25%
International Developed Market Equities 40%
Emerging Market Equities 15%
Global Bonds* 10%
Alternative Investments** 10%

* with currency risk removed for a sterling-based investor
** This includes asset classes such as property and commodities

 

Choosing the underlying investments

In terms of choosing the underlying constituents for our Model Portfolios, our Fund Selection Team looked first to the ‘Super 60’ list of our highest conviction investment choices. These investments have been through a thorough due diligence process, comprising both quantitative analysis as well as qualitative research on the managers concerned.

However, diversification is also essential to building a robust investment portfolio, therefore we also looked outside the Super 60 list where we needed to introduce other high-quality funds that complemented the main equity and bond allocations.

Having selected the component funds for a given ii Model Portfolio, they were then weighted relative to one another, such that their combined underlying asset allocation on a 'look through' basis was aligned as closely as possible to that of the strategic benchmark of the ii Model Portfolio.


Maintaining the portfolios

Once a year we refresh the asset allocation of each portfolio, updating the strategic benchmark with any changes to our long-term assumptions regarding potential risks and returns across global asset classes, and reviewing all of the portfolio’s constituents. We then review the model portfolios every quarter, to ensure that they remain true to their objectives throughout the varying fortunes of both markets and managers. This rebalancing process ensures that the underlying asset class mix remains closely aligned with that of its strategic benchmark, while at the same time minimising the potential costs of rebalancing.

Our overall management process is designed to keep portfolio turnover low and trading costs to a minimum, in keeping with our belief that fund investment should be for the long term. We will therefore tolerate only small changes to each portfolio’s assets, and annual revisions to the underlying benchmark will also be kept to a minimum, where possible.

If changes are required, these will be published on the website and in our Quarterly Investment Outlook.

Can the portfolios be used by all investors?

Yes they can. If you are a ‘hands-off’ investor with limited time or financial knowledge, you might choose simply to replicate the ii Model Portfolio within your own investment account. For those with more confidence in their own investment expertise, the Model Portfolio can still be useful as a ‘reference portfolio’, helping you to follow a particular strategic asset allocation over time to achieve your ultimate goal, but allowing you to select your own preferred underlying investments.

First and foremost, you must select the model which is best aligned to your personal financial goal. Careful consideration should also be given to the risk attributes of your chosen model, as described in its investment objectives.

Your next decision is whether to select the active or low-cost version of a given Model Portfolio, depending upon your preference for potential additional returns versus a simple, ‘passive’ solution with the lowest possible explicit cost.

Please remember – we do not manage your investment portfolio. However you choose to use our Model Portfolios, it is important to check in regularly (at least quarterly), to keep abreast of any changes we might have made to model weightings or constituents. You will need to place instructions to buy (or sell) investments should you want to keep your portfolio in line with the Model Portfolio.

We will also publish quarterly performance and risk reports for each Model Portfolio, including attribution of returns against the strategic benchmark, so that you can better understand how your own portfolio is behaving and monitor its progress towards ultimately attaining your financial goal.

Please note: these are "model" portfolios only: they are not directly managed by ii on behalf of its customers. ii customers wishing to manage their own portfolios in line with these models should follow the suggested switches and rebalancing by logging in and transacting on their own account. The model portfolios do not take into account your circumstances and do not constitute a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised investment adviser.


Note: this is an abbreviated version of our methodology. For the full version please click here