Important Notice

The 1OAKFunds website is designed solely for Professional and Eligible Counterparties as defined by the Financial Conduct Authority and their professional advisers. To view the content you confirm that you have read and accept our Disclaimer. If you are not a Professional Client, Eligible Counterparty or professional adviser you should not proceed any further. In particular, the content of this website is for Professional Clients and Eligible Counterparties only and should not be relied upon by, or circulated, to Retail Investors.

Issued by 1OAK Capital Limited, authorised and regulated by the Financial Conduct Authority.  1OAK Capital Ltd (1OAK) (Registered in England & Wales Number: 06890293; FCA registration number 501453) provides fund management services for its customers. 1OAK Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered Office of 50 Sloane Avenue London SW3 3DD.

The 1OAK multi-asset funds offer investors a diversified and managed portfolio of  equities and bonds. Multi-asset funds have become increasingly popular as  investors recognize the benefits they offer. With a wide range of funds to choose  from, advisers must ensure that investment recommendation must be justified  and supported by detailed analysis.

The 1OAK multi-asset funds offer a potentially attractive solution for investors  looking for a managed multi-asset service. In this note, we describe seven reasons  why investors may prefer the 1OAK funds.

1. Guided by Blackrock

Most investment experts acknowledge asset allocation as the dominant factor  that determines the returns that investors receive. We believe that active asset  allocation is a vital feature of multi-asset investment. It ensures that the funds  maximize the diversification benefit and that the exposure to different markets is  consistent with expected risk and return.

We base the asset allocation of the 1OAK multi-asset funds on guidance from  Blackrock, the largest asset manager in the world. Their asset allocation is the  engine of returns for the 1OAK funds and the single most important differentiating  factor that separates the 1OAK funds from other multi-asset funds in the market.

Blackrock uses fundamental, bottom-up analysis to calculate the risk and returns  they expect from each asset class. They base their forecasts on detailed economic  analysis of growth and inflation. Figure 1 below shows the 10-year risk/return  forecasts from Blackrock's capital market assumptions.

Figure 1; Blackrock risk/return forecast

chart 1

Source. www.blackrock.com

Blackrock forecasts change in response to asset performance, current market  conditions and global economic developments.

Blackrock determines the asset allocation using these forecasts and estimates of  how different assets will perform relative to others to ensure that the portfolios  offer the best risk/return profile for each level of risk. Portfolio changes tend to  be incremental as positions evolve steadily over time.

2. Global asset allocation benchmark

1OAK has set up multi-asset funds to offer genuinely international exposure. There  is no domestic bias in the asset allocation. We believe that an unfettered, global  framework is the best way to maximize the risk/return profile of the funds. Any  systematic over-allocation to the domestic market is bound to reduce the  performance that the funds may offer.

The benchmark for equity exposure is MSCI All Companies World Index. MSCI has  developed this index to represent the full opportunity set of large and mid-cap  stocks across 23 developed and 27 emerging markets. As of November 2020, it  covers more than 3,000 constituents across 11 sectors and approximately 85% of  the free float-adjusted market capitalization in each market.

Figure 2: Geographic exposure of ishares MSCI ACWI ETF

chart 1

Source: www.ishares.com

For bonds, we use AGGG as a benchmark. The index includes government Treasury  securities, corporate bonds, mortgage-backed securities (MBS), asset-backed  securities (ABS), and munis to simulate the universe of bonds in the market.

Figure 3: Geographic exposure of iShare Core Global Aggregate Bond UCITS ETF

chart 1

Source: www.ishares.com

Most investors consider the index to be the best total bond market index; more  than 90% of investors in the United States use it as a benchmark for fixed income  returns1. The Agg consists of securities that are of investment-grade quality or  better, have at least one year to maturity, and have an outstanding par value of at  least $100 million.

3.Market leading low OCF

We understand how important it is to reduce costs for investors. The level of fees  is competitive with other multi-asset funds that offer active asset allocation. The  costs are at a level where advisers can offer an attractively priced service for  clients.

4.Performance

Ultimately, the most important reason to use a fund is the investor's expectation  of the fund's performance. Performance is inherently unpredictable, but we can  take steps to ensure that the returns of the 1OAK funds are in line or better than  the competition and consistent with what investors expect to receive

At any one time and over different holding periods, there will be funds that  perform better than the 1OAK funds and those that have not done as well. We  have created the 1OAK funds to be a core holding for most clients. Our objective is  not to be the best performing fund because the risks we would need to take with  investors' money mean that we may be the worst-performing fund if we were  wrong.

The 1OAK funds aim to generate consistently above-average performance. We  have developed a framework and structure that we think will offer this result.

Figure 4: Shows the performance of the 3 1OAK Multi-Asset funds from 31.12.2016 to 31.05.2021

chart 1

Source: 1OAK Capital and Bloomberg

5. Active asset allocation, passive implementation

Asset allocation is the main factor determining investment returns, and we believe  that active asset allocation is essential. Market conditions are constantly changing.  Economic growth waxes and wanes, inflation rises and falls, equity markets can  increase in anticipation of better growth or fall in expectation of falling profits.

Dynamic asset allocation allows the funds to have exposure to the equity markets

with the highest growth potential and allocate to the fixed income assets that will  offer the best returns. We believe that active asset allocation is a vital part of any  investment over the medium or long term.

We do not use actively managed funds in the 1OAK multi-asset funds. Actively  managed funds try to offer better returns than the index through stock selection.  Sometimes they succeed, sometimes they don't. It's challenging to identify  managers that regularly generate better returns in advance, and we don't think  that we have the skill-set to do this. However, we do know that the fees charged  by active managers are generally higher than for funds that track the index. As a result, we believe that the best way to achieve exposure to different market  segments is through passive, index-tracking investments.

Figure 5: Active implementation

chart 1

Source: 1OAK Capital

6. Currency hedging

Foreign exchange risk can be very significant for funds that hold assets  denominated in different currencies. Gains in the local currency of assets  denominated in a currency other than the fund's base currency can be reduced or  even reversed if the base currency appreciates.

Hedging the FX exposure can mitigate this risk and allow gains from assets  denominated in other currencies to flow through to the fund.

The 1OAK funds hedge all the FX risk through a risk management overlay. There is a minimal cost incurred which is insignificant compared to the volatility that this eliminates.

Figure 6: Shows an illustration of how performance hedged share classes will be similar and how the performance of unhedged share classes can deviate significantly

chart 1

7. ETF's and efficient portfolio management

The costs of getting market exposure have dropped significantly over the last ten  years. Large ETF providers now offer tracker funds where the OCF can be less  than 0.1%. The default position for the 1OAK multi-asset funds is to use these  low-cost funds to get market exposure.

It is possible to get the same market exposure at an even lower total cost in some  cases. The 1OAK funds can take advantage of "efficient portfolio management"  techniques where there are demonstrable benefits.

It's important to note that the costs of buying and selling assets are not included  in the TER or OCF but will affect a fund's performance. 1OAK use a swap with UBS  to gain exposure to some markets. Using a swap to get exposure to specific  markets eliminates the cost and charges associated with investing in another  fund. The brokerage commission that UBS charge to deliver the index returns is  similar to the costs that an index fund would pay.

A swap offers other benefits as well. There can be a pick-up because of the  beneficial tax treatment of dividends. When we use a swap, there is no principal  exchange, so we can also add value by managing the fund's cash.

Conclusions

The decision to choose one fund over another will be complicated and multi-  faceted. Investors may have to weigh several factors that pull in different  directions. Costs are a crucial consideration, but investors must also consider the  investment management process. In this note, we have presented seven reasons  why investors may choose the 1OAK funds.

  1. Blackrock guide our asset allocation
  2. Global asset allocation benchmark
  3. Low fees
  4. Performance
  5. Active asset allocation, passive assets
  6. Currency hedging
  7. Efficient portfolio management