Seed’s investment process can be summed up by the diagram below:

Real return objective of the portfolio and macro analysis:

Strategic asset allocation looks at getting the portfolio’s strategy correct in order to fulfil the long term goals of the portfolio (in terms of return and risk).

Strategic asset allocation makes use of long term capital market expectations (asset class expected returns and likely sizes of capital loss) to derive target asset weightings that will achieve the portfolio requirements over a long time horizon.

We make use of the following toolkit when developing the strategy to achieve the portfolio’s real return objective:

• Post modern portfolio theory where risk is defined as downside deviation and the aim is to protect the portfolio on the downside.
• Yale endowment investment approach where the portfolio is exposed to multiple asset classes which reduces the variability of the portfolio.

Tactical changes to portfolio:

There will be periods where asset classes are trading at either a premium or a discount to fair value. During these periods we overweight the cheaper asset class(es) and underweight the more expensive one(s). Whilst making these adjustments we remain within the target limits.

The tools used to guide our decision making in this regard are:

• Valuations: Each asset class has long term fair value metrics that we monitor. Current valuation levels are then compared to historic averages to determine if the asset class is expensive or cheap. Each asset class has its own valuation models that are updated on a monthly basis.

Selecting the managers:

At Seed we take a multi-manager approach in that we don’t select the underlying securities across the various asset classes, but instead outsource that responsibility to third party fund managers. Our process involves researching the universe of fund managers, and making allocations to those managers that we believe will outperform.

The following are attributes that are typically contained by the asset manager/underlying fund manager in our portfolios:

• Firm ownership: We favour asset management companies where the fund manager has a substantial ownership stake.
• Assets under management (AUM): AUM should neither be large that it makes managing the funds unwieldy nor to small that puts a strain on the asset management company’s ability to act as a going concern.
• Number of funds under management: We typically use asset managers with a limited range of funds.
• Investment process: Our equity managers are typically bottom up value managers who construct their portfolios from a blank sheet (i.e. they take no cognisance to the benchmark weightings).
• Investment professionals: Managers must most importantly have integrity. They should also have built up an excellent track record with a stable investment team.

Below is a flow diagram of the fund manager selection process:

The list of local funds and global funds is collected and analysed.

Funds that aren’t suitable for our clients are eliminated. Quantitative and qualitative tools are used to reduce the list further.

Detailed research is done on the managers’ whose funds perform well.

The top funds are then included in the portfolios, and monitored on a see through basis.

We will not necessarily replace a fund manager purely because of poor performance. If, through our analysis, we ascertain that there have been no material changes to the reason for selecting the manager/fund we will most probably remain with that manager/fund. We realise that outperformance generally comes in lumps, with different managers outperforming at different times. We are therefore weary of moving out of an underperforming manager (just as performance starts to pick up) into an outperforming manager (who then enters a period of underperformance).

Constructing the Portfolio:

Each portfolio will have a specific strategic asset allocation, which will be determined by the portfolio’s investment objectives, and won’t change. We then use the tools available to us (as described above) to determine what the portfolio’s tactical asset allocation position should be (i.e. tilts in asset allocation away from the strategy). Finally, once we know what the desired asset allocation of the portfolio should be, the portfolio is populated with the fund managers (that we have determined will offer the best risk/return characteristics) in the proportion that ensures that the final asset allocation ties in with the desired tactical asset allocation position.

Special note is made of combining asset managers that complement each other, rather than track each other, to get the correlation between fund managers in the portfolio as low as possible. This results in portfolios with enhanced risk/reward characteristics.

Performance attribution and analysis is conducted to ascertain where relative under/out performance is achieved when compared to the relevant benchmark strategy return.

Conclusion:

Through diligent application of our process we attempt to minimise the drawdown in portfolios, and capture as much of the upside as possible in the different economic cycles. The result of the actively managed portfolio is displayed in the chart below: