To some, employing a 32-strong investment team, including five economists, to run a suite of index funds may seem excessive. In the offices of Legal & General Investment Management’s
multi-asset arm, though, index investing is about more than just replicating the markets.
“We are concerned about blindly following risk profiles,” says Justin Onuekwusi, manager of LGIM’s Multi Index range.
“A lot of companies use technology to set out their asset allocation at the start of every month. We target the risk characteristics of the Distribution Technology asset allocation but then build the portfolio based on our own long-term assumptions.”
It is this focus on staying within clients’ risk parameters that is the differentiating factor between the LGIM range and other index trackers, says Onuekwusi, who arrived at the firm in
2013, after a three-year stint working on Aviva Investors’ multi-asset range.
He says: “While the range is called Multi Index and we clearly have a bias towards index funds, at the same time we currently have an unprecedented level of active management – 22% on the low-risk fund, with 17% and 11.5% on the medium and highest-risk funds.
“Of course, the long-term portfolio can often look different to the Distribution Technology portfolio but the risk will be similar.
“We have a five to 10-year time horizon across the portfolios, but we also take into account any risks on a one to five-year outlook, and alter the longterm portfolio accordingly.
“We do not have any limit on how much we deviate from the Distribution Technology asset allocations, because the most important thing is to remain within the risk profiles.”
Considering the array of potentially volatile outcomes on offer in the leadup to 7 May, the aftermath of the UK general election has been relatively serene – at least until the promised
in-out EU referendum rears its head.
While Onuekwusi expected the Conservatives to perform better than was implied by Labour’s long-held lead in the opinion polls, he is more hesitant when it comes to forecasting the future of the UK gilt market.
“We could see the Conservatives doing better than the opinion polls indicated because of the incumbency effect, but the election outcome really did surprise,” says Onuekwusi. “It should bring some stability to UK markets.
There is the referendum, which could cause some volatility, but in the short term it is business as usual. “We have what we call the ‘gilt dilemma’.
Cautious and defensive funds have a real predicament on their hands because, going forward, bonds are likely to be volatile and unlikely to give you the same protection they
“Also, with the European Central Bank buying bonds the way they are, volatility-wise there is nothing that is not on the table, and it could cause market dislocations.”
Onuekwusi’s reticence on UK government bonds translates into his portfolio, having brought his gilt exposure down to 12% in January, while also holding a cash weighting of 11.75%.
“In January, we increased our global government bond exposure significantly at the expense of UK gilts,” he says. “One thing we are concerned about is interest rates increasing before the end of the 2015. The market is pricing in at least a small rise this year, and I have no reason to disagree.
“We have been spreading the risk over different geographies and different fixed-income instruments, and we are being active in terms of asset allocation.
Also, our cash level is probably the highest it has been since the launch of the funds.”
Many investors are looking to protect their capital when it comes to playing the corporate credit market, but Onuekwusi prefers to take a more intrepid approach.
In the current high-pressure bond climate, however, investors are forced to either go further afield in search of viable fixed-income investments or creep back along the yield spectrum.
Some, like Onuekwusi, opt to do both. He says: “Our corporate bond allocation
is all high-risk – emerging market debt and high yield, with zero cash. Because those areas are quite inefficient, it is becoming more important to manage your bond portfolio
To gain this, Onuekwusi invests in the LGIM High Yield Bond Fund. “It is important to recognise that, given we have seen such a big fall in oil prices, the high-yield spectrum still has a bit of time to evaluate the fall-out from the energy sector, which accounts for 12% of high-yield.
“Also, the key aspect of high yield is avoiding companies that could default, and with the early to mid-cycle environment that we are in, we expect to do reasonably well.”
He also holds short-dated sterling corporate bonds, which account for 8.5% of his portfolio – 5% and 3.5% in his low and medium-risk funds, respectively.
“One of the funds we use is the L&G Short Dated Sterling Corporate Bond Index Fund, which gives us a decent yield while not taking as much interest rate risk.
“As we get closer to interest rate liftoff, we are going to increase our exposure in the fund to give us protection.”