AQ Investment Process

Investment Process

start

Agenda

Metrics & Results

6.

Optimisation

Asset Allocation

Fund Selection

Instrument Types

Why 8AM

5.

4.

3.

2.

1.

1. Why 8AM AQ MPS

Low cost, evidence based investing

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Traditional Portfolio Management

Speculative

Opaque

Inconsistent

High Cost

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8AM Portfolio Management

Evidence-based

Transparent

Consistent

Low Cost

Evidence-based?

Using research and data to invest like a scientist - not a clairvoyant

Clear desicion making and reporting

Minimising the effect of emotion and human bias

Investments spread to capture growth from a variety of sectors

Built to adapt and respond to current market conditions

A disciplined and rules based approach to buying and selling

2.Instrument types

Active & Passive fund selection

RESEARCH

INFO

PROS

RESEARCH

INFO

The Active/Passive debate

CONS

Passive

Active

There's an ongoing debate about whether actively managed funds are worth the higher fees they charge

We believe that quantitative analysis can enhance the efficiency and objectivity of fund selection and portfolio monitoring.

• Lower OCF is a side effect

• Passive funds provide a wide market lens
• They are an essential building block
• But can diversify away alpha in strong periods of thematic momentum

• Active funds provide a focused market lens
• Alpha decay isn’t necessarily a negative – it can be leveraged!

Blending funds isn't just about cost

A lens to the market

3. Fund selection

Relative scoring via quantative analysis

Quantitative fund screening

The AQ system ranks each potential fund in a sector based on absolute percentiles relative to all others in the ranked table.

Funds above 2nd decile are automatically sold

20% +

Funds in the 2nd decile are reviewed

10-20%

Evidence-based & dispassionate

10%

Funds in the top decile are acceptable

The AQ system replaces teams of analysts and fund pickers found at other more traditional asset management groups. In their place is a decision-making framework, designed to find and hold great funds – for an appropriate amount of time.

Much of the success of the AQ process lies within its dispassionate and objective sell discipline, as well as the ability to identify and back less well-known managers when the data supports such a move

Fostering a strong sell discipline

Caputuring alpha

'If it doesn’t add value – we don’t do it'

The investment process has been designed wholly around this principle

4. Asset allocation

Optimised & Responsive Long Term Positioning

Research carried out by Brinson, Hood and Beebower and published in the Financial Analyst Journal in 1986, found that:

90%

of investment returns can be attributed to asset allocation

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Divergent views

However, when considering the highest and lowest total allocations for both the UK and North America across 70 different portfolios with a ‘Balanced’ approach to risk we see very divergent views

Tactical or Strategic?

Different approaches to asset allocation

Long-term strategic asset allocation involves setting a long-term plan for your investments.

In contrast, short-term tactical allocation focuses on adjusting to take advantage of immediate market opportunities or risks.

We do not attempt to boost returns through tactical asset allocation, as history has shown that this typically erodes value over the long term.

Our approach

A blend of Dynamic Planner published allocations, augmented towards market neutrality

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Relevant in periods of market volatility for capital preservation

Responsivity

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Long-term strategic distribution that considers the optimal balance between risk and return

Optimisation

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Stability through market cycles whilst benefiting from the compounding effect over time

Growth

5. Optimisation process

What to expect

However, we can at any point hold an ad-hoc investment committee if we need to react to a significant market event.

Ad Hoc

‘Significant’ in this instance can be quantified as an unforeseen event that fundamentally alters the modelled status quo of each sector

Unforeseen data

Examples: Brexit vote, COVID, unexpected economic data…etc. These ad-hoc committees do not necessitate change, but are designed to re-test all current portfolio positions, considering the new data.

Test and re-test

MORE

AQ Optimisation

The investment process runs every two months as standard, as part of ongoing portfolio optimisation.

Whether scheduled or performed reactively, the AQ investment process follows the same five steps:

Research

Due diligence & Sense Check

Risk Assessment & Portfolio Review

Our research and experience indicate better results with changes every two months, keeping a close watch on portfolio drift without increasing friction.

Action

Communication

Clear reporting

6. Metrics & results

Does it work?

Key stats

Highlights from 2023

Average outperformance of 8AM AQ portfolios vs IA sector benchmarks during 2023.

Funds screened

46,368

Data points

1,669,248

Crystal balls used

Outperformance

12.83%

Source: FE Fundinfo & 8AM Global Limited – 01.11.2017 – 31.12.2023 Monthly observed rolling 12 month data - AQ fund picks versus relevant sector as binary win/lose outcome expressed as a percentage. Some sectors not in use throughout ‘since launch’ period – during periods of sector removal win/lose data has been removed from statistics. Back-testing performed using ‘walk forward’ methodology performing for ‘standard switches’ without use of ‘responsive’ – funds replaced based on fund with best score that had adequate platform availability and fund size.

Win rate

77.6%

An average of 77.6% of AQ fund switch decisions outperformed their benchmark sectors over 12 months.

AQ MPS 7

IA Mixed Investment 40-85%

Performance

AQ MPS 3

IA Mixed Investment 0-35%

AQ MPS 4

IA Mixed Investment 20-60%

AQ MPS 5

IA Mixed Investment 20-60%

AQ MPS 6

IA Mixed Investment 40-85%

= AQ

Peer group

We have sampled 700+ different MPS strategies and collated their data to last year end. Grouped by risk outcome and displayed using a ‘box and whisker’ This highlights the potential range of returns (whisker) alongside the concentration of 50% of the total distribution of returns surrounding the median (box).

June 2020 - December end 2023 vs Peer MPS

Efficient charging

Underlying OCF will vary depending on whether the AQ system detects quantifiable outperformance by active managers Maximum historic range is +/- 0.05%

Thank you!

AQ 6- 40.09% IA Mixed Investment 40-85% - 23.46%

Advisers are updated on any new changes made in our ‘Portfolio Change Report’, via our online portal and direct email reporting. Reports include full change rationale for any fund alterations as well as justification of any asset allocation changes.

Communication

AQ 3 - 9.49% IA Mixed Investment 0-35% - 3.41%

The portfolios also receive independent risk reviews from Defaqto and EV on a trailing quarterly basis

An informed approach

As a starting point, the Dynamic Planner strategic allocations, provide risk-neutral exposures at each level of portfolio risk.

VS

Active Cons

Higher cost Inconsistent alpha & value Market timing Manager styles Qualitative bias

Passive Cons

Limited upside potential No risk avoidance Inflexibility to market changes Inconsistent alpha & value High volatility

We have examined 70 portfolios that follow a 'Balanced' approach to risk, meaning that they have a rating of 5 out of 10 from Defaqto. These portfolios are flexible in their allocation methodology, and they do not aim to replicate the global market cap, which would result in an automatic allocation of over 45% to the US.

Passively managed funds, also referred to as index funds, aim to replicate the performance of a benchmark index. Since passive funds do not frequently trade their assets unless the benchmark index composition changes, the fees are generally lower. This reduced turnover leads to lower costs for the fund. Additionally, passively managed funds may have a large number of holdings, making it a well-diversified investment option.

Passive Funds

Scoring

Each Factor is scored from 1-100 relative to all other sector members

As a starting point, the Dynamic Planner strategic allocations, provide risk-neutral exposures at each level of portfolio risk They provide an example/benchmark asset allocation for each of the 10 segments on which the illustrated risks and return profiles are based, with one representing the lowest level of risk and 10 the highest. It should be noted that these are not ‘strategic asset allocations’ but simply guides as to the efficient use of each profile

Growth

AQ 7 - 49.50% IA Mixed Investment 40-85% - 23.46%

The Alpha Lifecycle

Alpha Decay

Essentia Analytica undertook a study on the lifecycle of Equity Alpha which highlights a common trend – thematic Alpha builds quickly, slowly plateaus and then slides towards mediocrity before sharply mean reverting The amount of time it takes for the lifecycle to finish varies, but the shape of relative returns is too often; up the stairs and out the window!

VS

Active Pro's

Potential for outperformance Adaptability to market conditions Risk mitigation Dynamic portfolio management Expertise & research Thematic concentration

Passive Pro's

Lower costs Diversification Consistent and transparent approach Reduced emotional decision-making Efficiency and simplicity Market-matching returns

The Investment Team meets to ensure the new picks do not misalign the portfolio risk levels with its assigned risk profile, and adjusts the allocations as required. All potential portfolio alterations are checked relative to our target strategic allocations, as well as the underlying fund exposures. The potential portfolio shapes are submitted to Dynamic Planner for approval – additional risk profilers receive data in quarterly arrears.

Risk Assessment & Portfolio Review

The newly agreed changes are then instructed with each of the platforms.

Action

Total Score

The addition of each ranked score, each with different weighting applied via a Scenario Modifier (Defensive or Neutral)

John C bogle (2007) the little book of common sense investing. J wiley & sons pp 80-81 US equity fund data from 1970-2005

Active fund inconsistency

The chart, courtesy of John Bogle, shows that less than 1% of US equity fund managers (red dots) consistently outperform their benchmark over a 36-year period are able to outperform their benchmark

The Investment Team can make informed decisions on shorter-term positioning relative to longer-term strategic allocations, based on the crowd sourced research of many providers at once. As with the whole investment process, as tactical asset allocation has been proven to be an inconsistent method of alpha creation (low value), but entirely relevant in periods of market volatility for capital preservation (high value), we prioritise neutral to defensive tactical allocation depending on market conditions.

Responsivity

Longer term allocations are augments toward 'market neutrality' - defined as the aggregate exposure of a selected MPS peer group, as well as independent macro analysis by research partners. The goals of the strategic asset allocation are twofold.

Optimisation

• Efficient use of each allocated risk profile
• Appropriate, neutral allocation relative to market leading peers

Actively managed funds have portfolio managers who make decisions regarding which securities and assets to include in the fund. Managers do a great deal of research on assets and consider sectors, company fundamentals, economic trends, and macroeconomic factors when making investment decisions. Active funds seek to outperform a benchmark index, depending on the type of fund and therefore often come with higher fees.

Active Funds

AQ 5 - 32.58% IA Mixed Investment 20-60% - 14.39%

The Investment Team is responsible for updating and checking the AQ system to generate all fund scores and raw data for the committee. During the initial part of the committee meeting, any independent research or macro analysis is reviewed, and any changes to the AQ sector 'gear' are decided as part of this stage.

Research

MPS Peers

As part of each committee, the Investment Team also monitors the shorter-term positioning of a number of peer MPS providers – analysing the Equity, Fixed Interest, Cash and Alternative exposures. This enables the Investment Team to make informed decisions on shorter-term positioning relative to longer-term strategic allocations, based on the crowd sourced research of many providers at once.

The Investment Team conducts a thorough review of AQ's data and flags any potential fund modifications. It identifies all new potential funds, scrutinizing fund size, liquidity, underlying exposures, retail appropriateness, and platform availability...

Due diligence & sense check

AQ 4 - 19.45% IA Mixed Investment 20-60% - 14.39%

1. Maximum Loss
2. Volatility
3. Maximum Drawdown
4. Beta
5. Positive Periods
6. Sortino
7. 1-month performance
8. 3-month performance
9. Sharpe
10. 6-month performance
11. Alpha
12. Upside Capture

1. Alpha
2. Beta
3. Positive Periods
4. 1 month performance
5. 3-month performance
6. 6-month performance
7. Sharpe
8. Sortino
9. Upside Capture
10. Maximum Loss
11. Volatility
12. Maximum Drawdown

OR

Defensive

Defensive ratios are given the highest priority, followed by a blend of Core and Responsive data, with the least importance given to Core.

Neutral

Assigns the highest relevance to a blend of ‘Core’ and ‘Responsive’ data, and gives the lowest relevance to ‘Defensive’ outputs.

Low volatility Max loss Low max drawdown (3 year)

Alpha Beta Positive periods Sharpe Sortino Upside capture (3 year)

1 month 3 month 6 month Performance