Investment focus - July 2008
Morningstar Associates Europe — portfolio construction approach
Continued...
Fund selection process
Morningstar’s fund selection process involves quantitative screening of the available fund universe, secondary qualitative review and then in-depth manager analysis. We conduct rigorous analysis on the historic returns of a fund, including risk assessment and attribution analysis. More importantly, holdings-based style analysis is employed to assess a manager’s strategy and the timing of investment decisions. Our ultimate objective is to ascertain whether a fund manager is truly adding value through the stated strategy. In other words, are they successfully implementing their investment
philosophy. This is true whether the manager is a ‘goanywhere’ special situations manager or a more mainstream growth or income investor. Inconsistency in our findings raises uncertainty regarding the validity of their arguments.
The global equity portfolio is assembled using a platform of equity funds from AEGON Scottish Equitable International’s Create range. Morningstar reviews this list to select the best possible funds to include in the portfolio. Evaluation of the underlying holdings within each available fund enables us to achieve our allocation targets more accurately than by simply assuming that each fund represents a single asset class.
Although Morningstar doesn’t impose set constraints on fund risk levels, we’re conscious of manager-specific risk and in certain circumstances it may be necessary to limit the percentage allocated to a single fund. This process is more art than science, relying on the extensive qualitative assessment of each fund. Due to the structure of the income guarantee on 5 for Life, Investment Control and Income for Life, there’s an explicit limit imposed on the weighting assigned to higher risk funds. We don’t believe that this constraint disrupted our portfolio construction process.
Ongoing monitoring
On an ongoing basis, Morningstar monitors the asset allocation model and fund selections, reports to AEGON Scottish Equitable on the investment performance and, when necessary, will recommend changes in the model weights and/or fund selections.
In the end, the global equity portfolio offers investors in 5 for Life, Investment Control and Income for Life well-diversified, high-quality exposure to theglobal equity markets, with active management by top-quality managers.
This article was provided by Morningstar Associates Europe Ltd. Morningstar Associates Europe Ltd is a wholly owned subsidiary of Morningstar Associates, LLC, and is authorised and regulated in the UK by the Financial Services Agency (FSA). Morningstar Associates, LLC is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc.