The guiding force of Toronto-headquartered RBC Wealth Management’s approach to asset allocation is to take a long-term strategic approach, with minimal tweaks in the form of tactical plays.
While Jersey-based David McFadzean, who heads the investment solutions team for operations in the UK, Channel Islands and Caribbean, acknowledges that as a consequence the asset allocation of its portfolios has “not changed historically that often” this is not the complete picture.
But before exploring the precise nature of RBC client exposure to the various asset classes, McFadzean says the service offering is consistently applied across all the centres from which clients can choose to conduct their business, with the region he covers extending as far as Barbados, the Cayman Islands and the Bahamas.
Given the Caribbean presence, it is not surprising that US citizens are in the frame, and within the UK, RBC can service these clients in London with an SEC-registered company.
But although it might follow that Canadians are also looked after as part of McFadzean’s remit, the reality is that there are “various regulatory reasons” why they would typically deal with RBC in Canada.
The otherwise broad client base includes expats in Dubai, Singapore and Hong Kong, reinforced by RBC’s presence in all these three locations.
McFadzean’s team also give strategic and research support to RBC Wealth Management’s discretionary and advisory investment side of the business as well as a bespoke investment service for ultra-high-net-worth clients.
Taking aim
The conversation with expat clients on their aims and objectives, time horizon, ability to tolerate loss and,more fundamentally, what the pot of assets is for, is usually pretty involved with contradictory answers. So, for example, there may be a wish to invest in equities but also a zero tolerance for loss.
Tax is another area that requires careful explanation, as McFadzean explains: “We’re not tax advisers and we always encourage clients to take independent tax advice but very generically, clients in jurisdictions where there might be a higher tax on income may wish to structure their investments so that most of their investments are capital gains.
“But often we find the differential is not that great and so we encourage our clients not to let the tax tail wag the investment dog, and that’s particularly true of expat clients.”
The range of assets covers cash, bonds (split between government, corporate and emerging market debt) and equities, which are assessed both regionally and globally.
“Some of our clients prefer to invest in equities on a global basis but others would have an allocation specifically to the UK, the US, Europe, Asia and emerging markets.”
For both bonds and equities, while there is a choice of funds and/or direct holdings in individual stocks and shares, McFadzean’s preference is usually for funded solutions because he thinks that clients get better diversification, particularly as RBC has an open architecture approach.
However for those who may want direct equity exposure to a particular area, such as the UK part of their portfolio, RBC is “pretty flexible”, he adds.
Alternative investments are also in the frame, covering fund of hedge funds, direct hedge funds, commodities and real estate.
The example shown (overleaf) for a balanced portfolio further includes 20% in multi-asset funds which perform the role of effectively outsourcing the tactical asset allocation.
“Our asset allocation approach is broadly a long-term strategy and what we don’t do is sit a tactical model on top of that. The multi-asset managers will execute that tilt within their portfolios, whether it’s overweighting equities or underweighting Japan, whatever that happens to be.”
Team players
On the funds side there are around 20 people doing the research who are based variously in Toronto, Jersey, London, Minneapolis, Hong Kong, Singapore and Geneva.
This takes in quantitative screening, drilling down into the performance numbers, the Sharpe ratio, other risk-adjusted measures and rankings against peers.
But McFadzean says RBC’s differentiating factor is the qualitative research conducted by the fund team, comprising people from a wide background such as ex-fund managers, investment consultants, and others who have previously worked for pension funds, on trading desks or for hedge funds.
“We conduct site visits and go and talk to the fund management companies. A number of our competitors would certainly speak to the fund managers and the analysts but we look at the organisation as a whole.
"So we speak to the HR people, for example, to talk about the compensation structures that fund managers might have in place.
“We’re also keen to hear from the operations people in terms of what their business continuity or disaster resumption plan is for funds we invest in. We treat it almost as if we were buying the company in terms of the due diligence we do. It’s across the board rather than concentrating on the one person who is managing the fund.”
Precautionary measures
One small change to the asset allocation made over the past year was the purchase of the Blue Bay Investment Grade Libor Fund to form 6.5% of the portfolio, to reduce interest rate sensitivity to fixed interest exposure.
“We do expect government rates to start grinding higher over time and fixed interest returns will be challenging.
This fund offers some protection from those rising government yields but it does maintain a reasonable yield for the credit risk within the portfolio.
"That reflects our view that we prefer shorter duration to longer duration, and in general we prefer corporate to government bonds.”
With equities, McFadzean says RBC has noticed a return to fundamentals across markets. By this he explains that equity markets are “moving on the things ‘they should move on’ rather than what a politician happened to say in a briefing session the week before. That’s positive for stock pickers.”
As for the regional weightings, these have changed little over the last year.
“Our equity stance is broadly neutral so we are recommending that clients have their benchmark exposure, depending on their risk profile to equities.
"But within that we are underweight UK, overweight Japan and broadly neutral towards the US and Europe. We haven’t changed our allocation to equities within our strategic asset allocation. We would just expect our stock pickers within those different asset classes will turn in excess performance because it’s a good environment for stock picking.”
An emerging strategy
So how does this work in relation to Emerging markets? McFadzean says its view is best described as cautious, having combined strategic exposure to both emerging market debt and emerging market equities in the balanced portfolio at just 6% (3% in EM debt, 3% in EM equity).
However, the global equity managers are allowed by RBC to invest in emerging markets on a tactical basis up to around 10% to reflect their views, and the alternative and multi-asset portfolios can have exposure, too.
“Emerging markets 20 years ago were seen as a homogenous asset class. The view today would be these are standalone economies and to pick companies and countries with care. It’s still a fertile hunting ground for investors but we do have to cherry-pick more in those areas.”
If there is one fund in the balanced portfolio that sums up the RBC approach to selecting funds (see core funds list below) it is the Ballie Gifford UK Equity Fund, which takes up almost 10% of the portfolio, and is what McFadzean describes as “a sort of poster child” for what he has been talking about.
The conviction fund managers at this Scottish investment house have a bottom-up stock selection process and focus on the fundamentals of the company, believing that earnings growth is what drives stock prices.
“Their performance over the past five years has been very good. We look at rolling three-year excess returns and that’s been positive over the past 24 consecutive quarters, so back to the end of 2007.”
The other key positive, which gets a big tick from the qualitative analysis of the funds, is the structure of the business.
“It’s a partnership, so they have extremely low employee turnover, strong investment in the business and it enables a partnership to develop between ourselves and the fund manager which again gives us confidence in their ability to deliver for us.”
