Equilibrium on why in-house trumps DFMs for investments

Equilibrium Asset Management partner and investment manager Mike Deverell explains why the company’s in-house approach to investing compares favourably against the use of DFMs

What does your investment management approach look like?

We run our investment management in-house. We focus on asset allocation and buy collective investments including open-ended investment companies, unit trusts, some exchange-traded funds and, sometimes, structured products.

At Equilibrium, we have two linked functions – advice and investment management. Equilibrium Asset Management provides the advice and Equilibrium Investment Management is responsible for the management of our funds. Our investment research is carried out by our investment committee, which comprises advisers from Equilibrium and members of our investment management team.

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What investment options do your clients have?

We have three core funds – IFSL Equilibrium Cautious Portfolio, IFSL Equilibrium Balanced Portfolio and IFSL Equilibrium Adventurous Portfolio – which we launched in November 2017.

We previously ran model portfolios but decided to bring in a fund structure, as it is an efficient way of managing portfolios.

Investing in a fund is cheaper than investing in a model portfolio via a platform as you do not have to pay for the platform. Other benefits of the fund structure are the speed of reaction and a wider range of investment choices.

We also offer bespoke portfolios which invest in the same things in similar proportions. One reason for providing bespoke.

Some want to include or exclude certain things or have more or less, relative to the funds.

These clients are more likely to have other assets that need to be taken into account. For example, they may have equities elsewhere that they cannot sell because of capital gains tax.

Do you use discretionary fund managers?

We don’t, but we have considered using them. We looked at offering Aim portfolios through DFMs for clients who wanted to do inheritance tax planning using business property relief, but we found them to be expensive and opaque.

In the end, we set up our own Aim portfolio. DFMs are not for us; we can do what they can do in-house cheaper and more efficiently.

Equilibrium: Company fact file

Date company established: 1995

Assets under management: More than £850m

Number of staff: 83

Number of clients: 1,078

Platforms used: Nucleus and 7IM, Transact occasionally

DFMs used: N/A

Which platforms do you use and why?

We use mainly Nucleus and 7IM, and we also use Transact a little bit for Lifetime Isas. We review our platforms annually.

We’ve used Nucleus and 7IM for a long time because they are both very good in different ways.

We like Nucleus because it provides a choice of tax wrappers, onshore and offshore bonds, and it is good value for money. We also need the right functionality – we’ve got to be able to make bulk switches.

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How do you select funds for your funds and bespoke portfolios?

We have detailed criteria for selection. If we’re looking at a new fund, we look at the written objective of it.

We have our own tools to screen funds and we look at consistency of performance and the consistency of alpha, then we score them.

If we like a fund, the second step of due diligence is a questionnaire of 50-odd questions that fund managers answer, then send back.

If a fund gets through that stage, we arrange meetings with the fund manager. We then present the research to the team, so they can challenge it, and we end up with a decision. We repeat that process every quarter.

What would trigger a change in your funds and portfolios?

If something is not performing as we expect, we will want to know why. We want to make sure it is still doing what we want it to do. It is a rigorous process and holdings are constantly being reviewed. If a fund manager leaves, that is always a trigger for review – it may not always be a hard sale but that often does result.

Some funds are based on a team approach so an individual departure doesn’t necessarily affect it, while other funds are based on one person.

If a fund underperforms consistently over time, we would look at whether it is behaving characteristically or if it no longer meets the criteria. For example, we held Woodford Equity Income as a conservative UK equity fund but over time it moved away from traditional equity stocks. It had a small amount of unlisted and biotech, and started buying more cyclical stocks which didn’t fit the conservative approach we wanted.

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What are the benefits of your approach to clients and to the business?

The key thing is how it all fits together seamlessly. It’s important that the adviser is part of the investment process even though the research is done by our investment committee. We run every new investment or asset allocation decision by them and they feed back to us what clients are thinking and talking about, which helps us tailor our investment strategy to what clients want.

We looked at various options, including partnerships with other firms, and we think it is a much more integrated experience for clients if we can do the financial planning and investment management.

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