All posts by Najib El-Rayyes

Consumer Duty Requirements

Consumer Duty

Rivers Capital Management Limited (Rivers) is subject to the FCA’s Consumer Duty (“Duty”) rules, specifically in our role as a Discretionary Fund Manager and manufacturer. As such we are required to take appropriate steps to ensure our products remain compatible with the intended target market and chosen distribution strategy.  

To meet our regulatory obligations, we have reviewed our existing arrangements, governance, investment strategies, policies, and procedures, etc. in order to identify any required enhancements to our current processes and procedures in light of the Duty.

In accordance with the new regulation, we have undertaken a review of:

 

•      Target market information.

•      Fair value assessment.

•      Financial performance.

 

What information is Rivers Capital going to provide to retail distributors?  

Rivers Capital will provide example client statements, value assessments and detailed portfolio investment parameters to distributors in relation to the Model Portfolios we manage, and which are available to UK retail customers. The scope of shared data will include:

 

•      A summary of a target market for whom our products are designed, which takes into account customers with characteristics of vulnerability.

•      Information on overall prices and/or fees.

•      Our assessment of the total costs and value assessment by portfolio.

•      Individual model portfolio parameters.

•      Financial performance analysis.

 

In addition, Rivers will continue providing Portfolio data for Rivers advised portfolios via factsheets and rebalance notes.

What are our expectations of UK retail distributors under the Duty?  

To help us ensure we provide products designed to meet the needs of UK retail customers within the scope of our target market, we expect distributors, who sell to UK retail customers, to share information with us under the Duty: We would expect you to inform us in the following cases:

 

•      If there are any issues identified by a distributor of our products in relation to our target market assessment.

•      If there are any issues identified by a distributor during your ongoing review of our products.

•      If any issues are identified by a distributor or for customers of our products with regards to the product’s characteristics of vulnerability, to let us know what they are.

•      If any offering of our products outside the target market or any harm to UK retail customers is foreseen as a result of such offering, we also expect that distributor to inform us.

 

Target Market Information

Rivers Capital Management’s Model Portfolio Service (MPS) is a discretionary investment management service designed for retail clients and their advisers. The service offers a range of pre-built portfolios that are tailored to different risk profiles and investment objectives.

Rivers Capital Management MPS is only available to retail clients who are independently financially advised. The service is designed to complement the advice that the client is receiving from their financial adviser. The adviser can use the MPS portfolios as a starting point for developing an investment strategy that meets the client’s individual needs and objectives.

 

The Rivers Model Portfolio Service is suitable for clients who:

·       Are a retail client.

·       Have an investment horizon over the medium-to-long-term (five years+).

·       Have a capacity for loss.

·       Have an FCA Regulated financial adviser.

 

The Rivers Model Portfolio Service is not suitable for those who:

·       Have a risk profile that is not aligned with that of the model portfolios.

·       Cannot bear a loss of capital or require a guaranteed income or return.

·       Do not have a financial adviser.

·       Have a short-term view to investments (less than five years).

 

Accessing the Rivers Model Portfolios:

The Model Portfolio Service is available on a number of Discretionary platforms and can be accessed via various product wrappers, depending on the platform, such as:

 

·       Investment Account

·       SIPP

·       ISA

·       JISA

·       Bond

 

The Rivers Model Portfolio Service provides model portfolios suitable for investors with varying degrees of risk appetite, from the lower risk ‘Preservation’ model to higher risk ‘Aggressive’ model. The client’s risk profile should be aligned to the chosen model.

Please find in the appendix to this note, the investment parameters or constraints/objectives for each Model Portfolio offered to your clients by Rivers Capital Management. In addition, we have written sample investment policy statements as an example for a client, which we consider appropriate for each portfolio. These notes are for indicative purposes only. The individual portfolio parameters are designed to meet the needs of each target market and avoid causing foreseeable harm. Ultimately the objective of the portfolio parameters is to enable customers to achieve good outcomes and have reasonable expectations met. Our aim is to provide sufficient information to you, as distributor, to help inform your client assessment, particularly and needs and requirements that might be relevant for customers with characteristics of vulnerability.

 

Price and Value Outcome

Under the Consumer Duty, we are obliged to conduct a Price and Value assessment against all the products and services that we ‘manufacture’. This assessment must ensure that all our products and services provide fair value to the client based on the price the client pays.

To assess the Price and Value of our ‘manufactured’ products and services, we have broken down our analysis into three components: costs, performance, and service.

 

Costs:

Expected total costs – We have conducted analysis for each of our products and services, the underlying fund costs, including all transaction costs and the fee charged by Rivers. We understand that individual Financial Advisers may have different charging structures, as do different platforms. These costs are not necessarily disclosed to Rivers and as a result our assessment, and set limits, are net of these expenses.

Comparable market rates – We have compared the fee charged by Rivers, and the underlying portfolio cost against other comparable rates in their markets and found them to be good value.

Within the appendix of this note the Portfolio Parameters for each Model Portfolio contain total cost constraints.

 

Performance:

When analysing performance, we assess whether the delivery of the product or service is achieving good outcomes for customers. This has been completed through the collection of internally measured key performance indicators. The performance of the investment strategy has been evaluated against similar products available as well as generally recognised market benchmarks.

In the appendix to this note please find individual model portfolio performance analysis.

 

Service:

When analysing service, we have looked at whether the service we provide to customers is in line with their needs and expectations. This has been completed through the collection of internally measured service level agreements, the number and severity of complaints against each product and service and any feedback received, whether directly or through third-party market researchers.

A conclusion was then reached at each product or service level, as to whether we provide fair value to clients and whether we had any products, services or processes that may cause client harm or could be improved to provide better value to the client.

Based on our assessment looking at cost, performance and service, we have concluded that the Rivers MPS provides fair value to the target market.

 

Consumer Understanding Outcome

Rivers Capital Management’s Model Portfolio Service (MPS) meets the consumer duty requirement surrounding consumer understanding in a number of ways.

 

First, Rivers provides clear and transparent information about its investment process and fees. The firm’s website provides detailed information about its MPS portfolios, including the underlying assets, risk profile, and fees.

 

Second, Rivers provides distributors with ongoing support. The firm’s website includes a blog and a library of educational resources that help clients to understand the Rivers investment process and risk management. The firm also offers access to a team of experienced investment professionals who can answer their questions and provide portfolio information.

 

Third, Rivers requires distributors to complete, on behalf of clients, a risk assessment before they can recommend investment to Rivers MPS portfolios. The risk assessment helps to ensure that the portfolios are appropriate for the client’s individual needs and objectives.

 

Fourth, Rivers provides distributors with regular updates on any model portfolios made available to them. Rivers sends monthly factsheets, market commentary and updates to any allocation changes. Any portfolio changes are communicated in easy to understand rebalance notifications which justify all changes made. This also confirms continued compliance within the portfolio parameters agreed for each Model Portfolio.

 

By providing clear and transparent information Rivers Capital Management meets the consumer duty requirement surrounding consumer understanding. This helps to ensure that its clients, assisted by their regulated Adviser, are able to make informed decisions about their investments.

Rivers Monthly Focus July 2021

 

5 Year anniversary of the Rivers portfolios.

The end of June marked 5 years since Rivers launched its risk rated Model Portfolios on Platforms on June 30th 2016. While the scope since then has included the introduction of offshore and ESG portfolios (June 2017) as well as a number of tailored solutions the process has changed little since launch. Our objective then was, and still remains, to build portfolios using sets of diversified funds, combining both passive and active strategies. The Rivers tactical asset allocation strategy systematically adjusts those portfolios to align with the relative risk level, or attractiveness, of the global investment market according to our Risk Committee view. Given this anniversary, in this Focus piece we look back on the relative performance of that strategy. We are delighted to report that all targets have been met in terms of both risk and return. We are perhaps even more delighted to report that, on a risk adjusted basis, we can show that these unbundled model portfolios have outperformed very nearly all listed multimanager fund solutions, after all costs, over the last five years. Alongside this delight however we want to focus on how this performance was achieved, particularly given that, over 5 years of generally positive asset class value growth, the Risk Committee has maintained, for the large part, an underweight risk allocation. For much of the last five years the Risk Committee has held,  and currently hold, a belief that asset valuations are unsustainably high.

 

Our Global View

We have always tried to take a global view on investment. Since our first Risk Committee meeting in 2016, in the aftermath of the UK Referendum which led to Brexit, we’ve tried to view the investment portfolios within the global context. The election of President Trump, whatever our views on him personally, was always likely to influence global economic growth more than Brexit. Despite Trump’s issues with China they affected asset prices less than we expected. His domestic policies, especially on tax, boosted the profitability of US companies, and equity markets, more than we expected.  Similarly the Federal Reserve, raising rates in late 2018, impacted asset prices less than we expected, and cutting rates so quickly, in early 2020, with the backing of aggressive fiscal intervention, boosted valuations for longer than we had expected. Our risk committee was correctly positioned for all of these calls but we were often too early in and often out too soon. Sometimes both. Tactical changes have added to our performance. adding risk during the falls of late 2018 and early 2020 has added value, but it is difficult to conclude that a generally underweight risk position over the last five years will have added value.

 

Adding Risk

Objectively speaking the ability to add risk when it gets cheaper has added value, occasionally a lot, but that is not the biggest contributor to the success of the portfolios we manage. It has been diversification that have been key to the portfolio success at Rivers. By including Diversifiers into the portfolio allocation, which are investments with a low correlation to equity and Interest rate risks, it has been possible to add value overall while reducing losses during the few market falls that the markets have experienced.

 

Portfolio Construction vs Market Timing

The last 5 years, and in fact the last 12 years in reality, have been a time when a simple investment strategy of buying equity risk and adding interest rate risk (to lower overall risk) should have been successful. Over that period Equity indices have seen valuations increase to an astonishing degree. Mega-cap stocks have outperformed and interest rates, over the 5 years have gone from low to non-existent or even negative. In such an environment, adding value as active fund managers has been difficult. The only way to keep up has been market timing, which is difficult, or by the use of efficient portfolio construction. The fact that the Rivers portfolios have not only kept up with but exceeded, on a risk adjusted basis, all the multimanager funds available, passive or active, is primarily a result of efficient portfolio construction. With the wonderful benefit of hindsight it is fair to say the portfolios’ tactical positioning, while having allowed the adding of risk during market sell offs, has not taken full advantage of the opportunity. 

 

Difficult environment for passive strategies

As always with investment the tide changes. Price earnings multiples will not rise forever, inflation will rise, as will interest rates. We are not suggesting any of these economic certainties will make it easier for Rivers portfolios to perform but we do think it will make it a lot harder for passive, market capitalisation led strategies to do well. The lack of Diversifiers in such an environment will make portfolio performance even more difficult.

 

Overvalued Markets?

If, as we currently believe, the US market reaches a level beyond which even the most optimistic investor asks questions followed by a period of multiple “re-rating” then a pure equity and bond market approach is very likely to struggle. A diversified strategy, all other things being equal, will fare better. On a relative basis we expect a tactical diversified portfolio strategy will find it easier to outperform over the coming five years than it has over the last five years. If we are wrong, and the market continues to rise indefinitely, then we remain confident the Rivers portfolios will continue to meet their objectives.

 

 

Disclaimer: Rivers Capital Management is authorised & regulated by the Financial Conduct Authority (FCA) Reference No. 801238  The Model Portfolio is not suitable for all types of investor and investor accounts may only be attached to it by the instruction of a professional Financial Adviser. Past performance is not necessarily a guide to the future performance. Market movements may cause the value of investments and the income from them to fall as well as rise. Unless otherwise stated, the source of all figures contained herein is Rivers Capital Management. Whilst all reasonable care has been taken in preparing this update, the information contained herein has been obtained from sources that we consider reliable but we do not represent that it is complete or accurate and it should not be relied upon as such.

Rivers Monthly Focus May 2021

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During April, the Rivers managed portfolios were rebalanced to the most defensive position possible for each risk rating. This was done as many equity indices were setting alltime highs, Central Banks were continuing with unprecedented monetary stimulus and governmental fiscal spending was pushing national deficits to record levels. There is cause and effect here. For valuations to be sustained at current levels, or rise further, investors must believe that monetary stimulus and fiscal support will be sustained and that economic growth accelerates rapidly. We think that the likelihood of these three conditions being sustained is not only improbable but impossible.

 

In the simplest terms, economic growth will negate the need for fiscal support and accelerate the need for monetary constraint. The reason for the former is the growing government deficits, the reason for the latter is inflation. Inflation, dampened by globalisation and fiscal austerity is now the biggest risk for investors today. In this update we look at why the already obvious signs of inflation are not transitory, as many Central Banks suggest, and why the pressures it will impose on monetary conditions cannot, sensibly, be ignored for very long.

 

To start on a positive note we think that economic growth in the coming quarters, in the UK And Globally, will be strong. Pent up consumer demand, a relaxation of lockdown restrictions and generous government support make economic growth in the coming quarters almost certain. The most obvious risk to this may be the re-emergence of the pandemic, for whatever reason, but this is not a major factor in our current cautious outlook. On balance we think despite the risks, economic growth will surprise to the upside. Unemployment will fall rapidly and corporate earnings will grow. We do not think they will grow to the extent being predicted by analysts but not because of a shortage of sales but because of rising costs.

 

The costs which are most concerning are material input costs and labour costs. As material input costs are determined by commodity prices they have already risen substantially. Be it because of low levels of investment, in the case of oil and traditional energy, or Covid supply constraints, in the case of timber and agricultural products. Nearly all commodities are at all-time highs and producer prices indices have reflected this for a while. Labour costs are arguably less likely to rise because of high levels of unemployment. That said, in the US, average hourly earnings shot up 8.2% in April and since June 2020 have an average year on year gain of about 4.8%, currently (just) ahead of inflation. The wage rise in 2020 (in part due to Covid restrictions and some sort of “hazard pay” premium) is probably “transitory,” but wage growth is characteristically stubborn. It rarely reverses and if economic growth is strong, as expected, wages are set to increase when activity heightens in the summer. In the UK many pay settlements are closely related to inflation so the problem is self-perpetuating.

 

Last week in the US the effect of overall price rises became clear. The April Consumer Price Index or US CPI rose, on a year-over-year basis, to 4.2%, before seasonal adjustments. This was the biggest increase in monthly CPI since 4.9% in September 2008. A similar effect is likely in the UK this week. With producer prices (PPI) appearing to rise both sides of the Atlantic it is likely this trend will continue for some time.

 

The fact that inflation cannot be ignored by Central Banks for very long can be seen in its effect on benchmark interest rates already. Despite the Federal Reserve buying $128billion dollars of US debt per month, in an attempt to suppress rates, this month the yield on 10 Year Treasuries rose to 1.7%. Historically this is not high but compared to 0.60% last August it is a significant jump, all while interest rates were set to zero and during the most aggressive period of quantitative easing ever. It appears that when there is real inflationary risk, quantitative easing is less successful at reducing Treasury yields. The US 10 Year Treasury rate is the benchmark ‘discount level’ used for future corporate earnings evaluation, if it were to continue to rise, say above 2%, it would make equity valuations look even more extravagant, and unsustainable than they do already.

 

With hindsight, the fiscal stimulus provided by President Biden’s $2trillion package early this year may be called into question. As it was distributed directly to consumers already looking forward to spending built up savings (as well as some deserving needy), its effect on inflation has been material. The suggested $4trillion to come is at least targeting infrastructure spending so may not increase consumer spending so directly. The Federal Reserve is keen to argue this inflation is transitory, but if economic growth accelerates as they are also predicting, it is difficult to know what, other than higher interest rates, will slow it.

 

With this pressure on inflation and some compelling evidence that equity values have been inflated by high levels of speculation, we have adjusted the portfolios accordingly. We have reduced equity exposure, especially in the US, where valuations are highest and increased the allocation to assets more likely to offer protection from inflation. While we have attempted to add inflation protecting assets our overall objective has been to lower risk. We do this, as always, with the expectation that risky assets that are available today, will be available in future at lower prices or better valuations. While we wait for that to occur the portfolios should continue to offer positive returns.

Rivers Monthly Focus April 2021

 

The Pandemic One Year On

This time last year countries around the world were beginning to formulate strategies of how to tackle the Covid-19 pandemic. They realised that drastic action was required to contain the spread of the virus and mitigate economic damage. Many governments concluded that without fiscal and monetary intervention, a crisis unlike any seen since the great depression was a distinct possibility. A year on, while there is still a long way to go before we can say that the pandemic is over, there are some bright spots on the horizon. Arguably the most important is that both the US and the UK have implemented successful vaccination campaigns, with the US announcing 3 million vaccines given per day and the UK approaching the milestone of 50% of the population having been given at least one dose. This month we look at the likely routes out of the pandemic for economies and where the best tactical investment allocations lie. 

 

US Stimulus

We can already see business cycle indicators showing that the global economic recovery is underway. This has been driven to a large extent by the strength of the US economy and the pent-up spending potential of US households as they receive their latest stimulus cheques. So far during the pandemic, stimulus payments to households now total around $3 trillion, this is equal to 20% of US personal consumption and is three times as much as was paid out during the global financial crisis. If this stimulus money hits the economy  as fast as economists are predicting, this will be beneficial for many sectors from leisure and hospitality to retail and financials but may well highlight supply constraints. 

 

Jobs Recovery

We think that the best pockets of upside lie within those sectors that are at the value end of the market. Growth stocks have been the real drivers of stock market performance since the Financial Crisis but it seems that a value cycle may now finally be underway. The major caveat to a strong US market is that strong financial conditions will bring inflation back into the equation, especially if tight labour market conditions trigger sharp wage increases. In spite of the surge in new jobs in March, total payrolls are still 8.4 million short of where they were pre-pandemic, but given that payroll figures were a third higher than estimates, things are going in the right direction. 

 

What is difficult to ascertain is how much of the good news has been discounted by the market. We believe that a significant amount has and this will likely lead to increased volatility as multiples are hitting historic peaks, medium term interest rates are rising and tax hikes are being debated in congress. It is volatility stoked by the uncertainty around these factors in which we see the best opportunities for our clients.

 

UK Return to Growth

The UK’s growth rate has suffered more than most developed economies partly due to the poor initial handling of the pandemic and potentially, the hidden impact of Brexit, which is ongoing. Moving forward, this has been offset to some extent by the speed of the vaccine roll-out, to the extent that the IMF has just revised upwards its 2021 growth rate for the UK economy from 4.5% to 5.3%. The UK market remains undervalued compared to its peers but caution is warranted given the headwinds.  These headwinds include the huge debt to GDP burden and the unresolved issues of the post Brexit economy.

 

Europe slow on vaccine roll-out but markets strong

Our European neighbours have been publicly battling a shortage of vaccines as the virus spread continues.  A third wave has forced some countries into further lockdowns which pushes economic recovery  further out. Despite the slow rollout and the new lockdowns, Eurozone markets have significantly outperformed other global markets. During March many EU indices, including the German Dax 30 and the French CAC 40 materially outperformed both the S&P 500 and the FTSE All Share. Since late 2020, the region has benefited from the rally in value sectors, where weightings are higher due to a prevalence of more traditional industries, as growth and high-tech sectors have lagged.

 

EM performance steady rather than stellar

Emerging markets have been mixed with countries like China able to handle the pandemic well (Non-manufacturing activity expanded for 11 months in a row, while export growth is 32% above trend), to countries like Brazil, which is currently riven with both political uncertainty and a laissez faire attitude to Coronavirus control. On the other hand, India’s economic and market outlook remains positive as the government seems to want to avoid any major lockdowns. At the moment, It appears that the second wave will not meaningfully diminish the strong economic bounce back, which is bolstered by the government’s loose fiscal stance. India has one of the strongest real GDP growth outlooks globally with 12.5% upside between now and 2022.

 

Return to inflationary environment

When constructing multi-asset portfolios the spectre of  rising interest rates, when both equities and bonds are expensive, is daunting. The fear of inflation has been affecting bond markets since the beginning of this year yet it has seemingly been ignored by equity markets. As we begin to see economic recovery accelerating with companies and consumers holding record cash in reserve we expect there will be upward pressure on prices..  Whether this translates to sustained inflation is, currently, the most debated point of all amongst investors. The risk that it does, is enough to justify our current cautious stance. Any further rebalance, lowering exposure, needs to be well timed and short lived. With current valuations already pricing in an almost perfect scenario we think the opportunity cost of lowering risk further is low.

 

The Rivers Outlook

We are seeing strength in many markets both developed and emerging and indices are hitting new all-time highs driven to a large extent by momentum and money flows but we think that some caution is warranted. We have positioned our portfolios to take advantage of the upside in the markets while still protecting our clients’ capital on the downside. We believe that given the underlying structural shift in the market driven by inflation fears and exuberant valuations we will see more volatility which will provide good opportunities for us to deploy into those asset classes like value and subsectors like energy, semiconductors and consumer discretionary, where we believe there are still potential returns to be found.

 

Rivers Monthly Focus February 2021

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Global equity markets have been volatile but generally increasing in value since the lows of March 2020. While believing the opportunity to increase risk at these lows was good we have become concerned in recent months that valuations have become too high. This is most significant in the valuations seen in technology and more generally in US stocks. The availability of liquidity and low interest rates have been obvious drivers for this phenomenon but so too has rising retail investor speculation. For this month’s Focus we take a look at this speculation and specifically at the very unusual events that occurred around GameStop stock in the last week of January. 

 

GameStop, an ailing bricks-and-mortar US retailer of video games and consoles, is interesting as it was the clearest example of social media led, speculative activity in recent months. The stock, unloved and loss making, had drifted down from around $50 in 2015 to under $5 in October 2020. It increased to about $20 at the start of 2021 and in the last week of January it rose 323 percent meaning that for the month it was up around 1,700 per cent. This was a speculative bubble. That is, the price departed wildly from the fundamentals. Some investors who got in early and got out early made a lot of money. Just as many people, who got in too late or stayed in too long, lost a lot of money, as valuations came back to earth. 

 

The GameStop episode became newsworthy, as it tested a common interpretation of the financial markets. It was reported as a David versus Goliath situation where on one side the little guys (mostly amateur traders, mostly young, stuck at home), were able, by coordinating with each other on message boards, such as Reddit’s forum “WallStreetBets”,  to conspire to create the speculative bubble. On the other side, hedge funds or big Wall Street or City traders would fail in their quiet conspiracy to unfairly bet against vulnerable corporations to drive down prices – known as “going short”. 

 

The question posed was whether financial markets competitively and efficiently allocate capital via the medium of the stock price or if instead they are rigged in order to make unseemly profits at the expense of the little guy. Remarkably, the little guys dominated for a while. Perhaps, at the beginning, they evaluated GameStop as genuinely worth a bit more than the price it was trading at. But then they kept going. They succeeded in creating a speculative bubble even with the hedge funds pulling in the other direction. More often than not, it is the latter that prevail. In this case, the hedge funds appear to have swallowed their losses and to have refrained from taking further short positions.

 

There is no need to feel sorry for the hedge funds. Their business is risk. They are aware of the wisdom in the dictum, often attributed to Keynes, “The market can stay irrational longer than you can stay solvent.” Even after taking their losses, these institutional investors remain wealthy. But the hedge funds in this case are not bad guys. They were doing what they were supposed to do: pushing the price of GameStop toward a level more consistent with economic fundamentals and thereby sending a useful signal for the allocation of capital.

 

There will be some traders for whom one should feel sorry. Those are the ones who jumped on the GameStop bandwagon, buying after the price had already begun rising, and determinedly stayed in even as the price went down. As a consequence of playing the Reddit game, they probably lost most of the money that they invested – losses that some of them will be ill able to afford. Gamestop now trades at about $45 having peaked at $450. According to some reports the hedge funds ‘closed’ their short positions at $118 so all the purchases above that price were retail investors buying stock which, according to even the most optimistic analyst is not worth $25.

 

Unsurprisingly the regulator is investigating what has happened here. There is no doubt that a ‘conspiracy’ to manipulate market prices had occurred. The result is likely to be more regulation and further restrictions on commission free trading, especially leveraged positions. To us this is indicative of a high and rising level of speculation that highlights our current preference for caution. If retail investors, taking no regard for the fundamentals of a stock, are able to generate sufficient demand to manipulate prices, even in the short term, there is probably an excess of liquidity. Further analysis of small sized derivative trading shows that this speculation is not limited to single stocks but is now at levels not seen since the Dot-com boom of 2000. The bias of purchasing calls over puts (betting on market increases over market decreases) is also the highest since 2000. With speculation this high, we prefer to take a step back which is why we rebalanced recently to lower the portfolios’ overall US exposure. Our overall risk level remains at 2 (out of 7) but we have increased overall non-US equity exposure where valuations are, on a relative basis, more attractive.