Our head of multi-asset investments, David Coombs, would rather be riding round in a DB7 than reviewing COBS 6.1ZA.8. But he shunned living the spy’s life years ago in favour of investments, so here we are. He outlines our new benchmarks for DFM business and explains why he thinks they will complete the mission.

17 December 2020

Now that the first vaccine has been administered we can, at last, look forward to No Time To Die, Daniel Craig’s last outing as James Bond. Quite apt.

I have always loved Bond films – apart from Roger Moore’s last few outings … oh, and a few of Pierce Brosnan’s – so I am very much looking forward to leaving house arrest and maybe visiting the cinema next year.

Like many men my age, we can track our lives around James Bond films. The first experience as a seven-year-old, a Dr No/Thunderball double bill in Devon. Remember them? My favourite was Live and Let Die (1973), seen at the Plaza Cinema in Cardiff with my Dad.

So, for me, all other Bond films are benchmarked against that film. Despite better acting in others and probably better plot lines it is still the one to beat for me. Yes, I have got to the point at last. You see, we use benchmarks all the time, whether for restaurants, cars and, indeed, investment funds.

Now, I have always been nervous about benchmarks when it comes to investing and probably not for the reasons that you would think. Back in the 80s and 90s, the CAPS Median Index (subsequently purchased by Russell Mellon) was the industry benchmark for comparing pension fund investment performance. The asset weightings were based on the median weightings of portfolios submitted to the survey. The US equity weighting was approximately 2%, so even if you moved to a 50% overweight then you might have just 3% of your portfolio in American stocks. For context, the UK weighting was typically closer to 50%. Just looking at the relative performance of those two markets over those two decades and you start to see the problem.

Because the index was based on the actual holdings of UK pension funds, for the index’s US weighting to increase to a more realistic level in global terms all the participants would have to take significant benchmark risk at the same time. Bearing in mind that you had to report to trustees every three months back then this was unlikely. So the weighting hardly ever changed and managers hugged close to an incoherent index.

This highlights what happens when it’s the manager’s investment objective to beat the benchmark and not to achieve the fund’s actual financial objectives. Thankfully we have moved on and liability matching became the norm and benchmarks and objectives became more aligned.

When I launched Rathbones’ multi-asset funds in 2009 we set real return targets as the funds’ objectives and they remain to this day. The LED (Liquidity, Equity, Diversifiers) asset allocation framework we developed for the funds and the focus on real returns were subsequently adopted by Rathbones for our discretionary fund management services (DFM) too.

Now, thanks to regulation, we must introduce a primary benchmark (COBS 6.1ZA.8 for those interested) for every DFM private client to help them ascertain value for money. Good idea in principle, however, I think, not in practice if you cannot set a real return objective as a benchmark. The rules state that the benchmark must be investible and based on security indices. It must also reflect the way the firm manages client money.

As a result, we considered a number of candidates, including indices by Asset Risk Consultants (ARC) and Personal Investment Management and the Financial Advice Association (PIMFA). The former is not investible, so doesn’t qualify anyway, while the latter is based on a quarterly survey of members’ average asset class weightings. If you think that sounds a lot like CAPS Median, than you might be correct.

To adopt the PIMFA index would mean we would use the same index as everyone else so we would probably end up looking like everyone else over time. That is not good in terms of choice for either you as an IFA or your clients. It also wouldn’t reflect how we manage money using our LED framework – something that is explicitly required by the new rules! It is very important to us to have the freedom to invest in line with our conviction not to allocate in line with the crowd.

This conundrum has left us with no choice but to design our own Rathbone benchmarks, which reflect LED and our six risk profiles. They are based on industry-recognised indices and include the major asset classes to which we allocate. They will be reviewed annually (not quarterly) and will only change if there is a significant change in the investment environment.

These stable, forward-looking benchmarks will allow our clients to make a more considered value judgement on the quality of service they receive from our discretionary fund managers. In addition, we are confident these benchmarks should provide better risk-adjusted returns than other industry measures in the future, resulting in better outcomes for our clients. For more detailed information on the structure of the benchmarks, click here.

So, will we be removing the real return objectives from our DFM offering? Definitively no. The benchmarks have been designed to meet the real return objectives over the medium to long term. Clients should, therefore, see very little change to their portfolios as a result of this development.

If you have any questions in relation to the new benchmarks, please contact your Rathbones representative.

In the meantime, I will continue in my quest to find a film that beats my own benchmark for greatest film of all time: The Italian Job. It will never happen. You cannot beat perfection. Mark Wahlberg tried, but underperformed.