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Changing views of asset allocation

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Nick Mustoe | Chief Investent Officer

• Nick is Chief Investment Officer of Invesco’s Henley Investment Centre. • Nick joined Invesco in June 2010. His investment career spans over 30 years to date, having started with Phillips & Drew Fund Management as a UK equity manager in 1985. More recently, he was appointed CIO of Pictet Asset Management in 2006 after joining Hermes Pensions Management as CIO in 2002. • He holds a first class honours degree in Business Studies from Bradford University.

“I think the best product will win out in the end. This range has its own unique features and we will live or die by our performance and what we deliver. I am patient and I believe in what we have created”

“Volatility throws up lots of very good opportunities for us but many investors are losing sight of that”

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managing risk the right way

Instead, he prefers Europe, Asia and Japan where valuations are still low both relative to the past and to the US and the growth backdrop is still positive. He is also underweight on fixed income assets including government and high-yield bonds, where spreads have been tightening. This ability to move across markets and assets becomes ever more appealing as the number of uncertainties facing investors racks up. Brexit, trade war talk and the prospect of a Labour government are just some of the issues investors are currently grappling with as they make asset allocation decisions. “The market is very short-term at the moment and a lot of people don’t want to have to take a view themselves. They just want a product that can invest across a whole range of markets and outcomes. Volatility is throwing up lots of very good opportunities for us but many investors are losing sight of that because they feel uncertain,” Mustoe explains. “Given the world we live in, with volatile markets and an uncertain political and economic backdrop, clients want a product that can take a broad view rather than picking individual holdings for themselves.” Another factor driving the popularity of multi-asset solutions is the increasing number of pressures on advisers, particularly regulatory and reporting requirements, which have become more onerous under Mifid II. Many IFAs would prefer to free up more of their time to spend with clients by outsourcing investment decisions externally. Risk-targeted products offer that opportunity. Mustoe adds: “We have been very focused on making this as easy for advisers as possible. It’s not just about delivering the investment returns and the appropriate risk, so we have reporting tools and other resources available as well.” The funds are also rated by independent agencies in such a way that they should fit into the risk scales widely used by advisers. With the priority placed on risk management for these solutions, investors may be forgiven for thinking that they might have to sacrifice some returns. Mustoe is confident, however, that as long as the asset allocation and strategic decisions are being taken correctly, there is no reason why that should be the case. Mustoe says: “These funds are a one stop shop. Whether you’re an end client or an adviser, you only need to make one key decision: how much risk you want to take. Then you leave the rest to the team.”

As volatility returns to financial markets, managing risk effectively is becoming an ever increasing priority to clients. Risk-targeted solutions are experiencing a surge in popularity as advisers look to outsource their investment decisions. This makes it a great time to launch a risk-targeted range of funds, says Invesco’s chief investment officer Nick Mustoe. The Invesco Summit Growth Range launched this summer, offering five risk-targeted solutions to appeal to clients of all different risk appetites. The five offerings will aim for between 30 per cent and 90 per cent exposure to equity market volatility, depending on their risk parameters. “The launch of this range has been spurred by demand from clients and IFAs. Investors need a multi-asset solution that is based on risk appetite,” Mustoe explains. He believes portfolios three and four are likely to be the most popular – these target 60 per cent and 75 per cent of global equity market risk respectively. He admits the team has been later than some rivals to launch its offering, but is confident that the approach it is taking will prove attractive to investors: “I think the best product will win out in the end, no matter when it launches. This range has its own unique features and we will live or die by our performance and what we deliver. I am patient and I believe in what we have created.” The Summit range will have access to an incredible 800 different Invesco funds from across the group’s entire suite, including 500 actively managed funds and 300 exchange-traded funds. While the range will solely use in-house products, there is no in-house view that the team must adhere to. “Investing in-house is more cost-effective, but it doesn’t limit us,” says Mustoe. With a career spanning over 34 years in fund management, he is confident the approach of the fund plays to his own strengths. He has been at Invesco for the past decade, most recently running the Managed Income and Growth funds. The Summit range builds on those capabilities, introducing the risk-targeting element. It is a “great discipline” with which to invest, he says. “Investing in different assets and strategies gives us a smoother result than focusing on a single market.” It is the ability to blend these active and passive products that will help deliver diversification as well as a cost-effective product. Although approximately 70 to 80 per cent of each portfolio will likely be in active funds, Mustoe notes that is how to get the alpha needed to outperform. “ETFs are a very good way of getting a broad market exposure and keeping costs down, and that is increasingly important in a world where clients are cost- conscious and advisers and fund managers must be transparent, but these are primarily active funds,” he adds. The team generates a long list of 60 to 70 ideas from the available universe of funds and whittle them down to build each portfolio. In order to do this, they will take into account their strategic 10-year view on volatility and how different markets are correlated to one another. The final piece of the puzzle will be Mustoe’s one- to three-year view on markets. He adds: “It’s about not standing still. We are always asking whether there is something else we can add to the mix.” Currently, he is underweight on US equities where strong performance has pushed valuations to higher levels. He explains: “I’m still bullish on equities, even despite the turmoil in the markets. I think equities are the place to be. But there are better opportunities in other regions than the US.”

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A world of risk-targeted funds has opened up to investors that shows lots of appeal in uncertain times, while offering a cost-effective approach, says Nick Mustoe, chief investment officer of Invesco’s Henley Investment Centre