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How thematic investing works with Tiller

Background

 

The ability to add a thematic investment into your portfolio is a new concept in the UK online wealth management market. Whilst many wealth managers offer discretionary portfolios, not many offer the ability for the client to include ideas they are passionate about.

At Tiller, we enable you to have more control over your choice of investments by adding extra exposure to certain assets, countries or market sectors.

In this article we want to explain how thematic investing works with Tiller, and why certain themes are only available to some portfolios.

 

What is a theme?

 

A theme is typically formed by having a top-down view of certain asset or market sector trends in the world. For example, an investor may hold an opinion that companies involved in clean energy are going to perform better than the wider market. Alternatively, investors may want to show their support for the development of cleaner energy by investing in this industry.

At Tiller we have researched a variety of passive and active thematic funds that investors can choose from to add to their portfolio.

 

How do I add a theme?

 

The ability to add a theme can only be accessed with a Select portfolio. This is our range of portfolios available to those investing £20,000 or more.

Those looking to setup a new portfolio would choose the Select portfolio option when choosing between the three portfolio strategy options. Core or Smart portfolios meeting the £20,000 minimum can be changed to a Select portfolio through the ‘Change Strategy’ button in their account.

Once in the Select portfolio area you will be presented with the different themes available for your risk level.

When you choose a Select portfolio and pick a theme, it gets added to a similar risk Smart portfolio – which is then adjusted to incorporate the theme. Our algorithm will keep you within your risk tolerance with a diversified portfolio.

 

Why do I need £20,000 to qualify for a Select portfolio?

 

With the ability to add up to 5 themes in a portfolio, the number of portfolio holdings rises to a point where our usual £5,000 minimum could potentially include too many small positions.

 

How does a theme fit into my Select portfolio? Can I just have a portfolio of thematic funds?

 

When you pick a theme, our algorithm will add it to your portfolio, with a position size of at least 2%. Remember all Select portfolios use a Smart portfolio with the same risk profile as a starting point. So, when you add a theme position, the algorithm blends the theme in with the existing portfolio, which may involve switching out some of the current positions to ensure that your risk profile stays constant. The algorithm is seeking to ensure your portfolio’s overall risk / return profile stays true to your risk profile whilst incorporating the new theme holding.

To keep your portfolio within an appropriate level of risk, we must ensure that the themes, and allocations to these themes, are suitable for your portfolio. For this reason, some themes are not available for investment by lower risk portfolios.

To take an extreme example, a client holding our lowest risk portfolio (risk level 1) would not be able to select and add a gold mining theme. This theme is too volatile to be consistent with a low risk portfolio.

Conversely, the same low risk client would be permitted to invest in a less volatile theme such as ‘ethical bonds’ as the algorithm would simply replace existing positions in low volatility bond funds in the portfolio with the new theme.

The table below shows how the maximum potential allocation to thematic funds changes in line with client risk levels.

 

Table 1

Risk Level Maximum portfolio weight in theme(s)
Low – Level 1 10%
Medium Low – Level 2 12%
Medium – Level 3 14%
Medium High – Level 4 18%
High – Level 5 20%

 

Within these percentages the total number of themes that can be included in a portfolio is five.

Our algorithm only allows these maximum portfolio weights for a couple of reasons. Firstly, although you pick which themes you want to hold, we are still the discretionary managers of the portfolio and responsible for keeping it within a reasonable risk level.

Secondly, thematic funds are by their nature less diversified than other funds we may hold. They are targeting certain sectors or regions of the world and these can perform differently to the wider market.

 

What percentage of my portfolio could a theme be?

 

As with all positions in a Tiller portfolio, the percentage weight is set by our algorithm with oversight from our Investment Committee. In other words, whilst we allow you to pick the theme(s) you want, we control and set the position size.

The algorithm then determines an appropriate position size and assigns a weighting for each theme within the portfolio.

The same principle applies if you add more than one theme to your portfolio. Our algorithm continues to add the new theme positions in, whilst keeping your overall portfolio within your risk level.

When market prices change due to movement in markets it will re-run an optimisation process and rebalance the portfolio accordingly.

There is one exception to this. If a theme is allocated a starting position of 2% and the theme drops in value – the algorithm will not buy more of the theme, to take it back to 2%. This would occur if the theme has been flagged by the algorithm and investment committee as being too volatile. The purpose of this rule is to prevent a situation where the algorithm continues to buy more of a theme that is trending downward.

To ensure portfolios always remain diversified we also limit the percentage weight of any individual theme holding to 8%.

However if multiple themes have been selected, the algorithm would prevent multiple themes being given the full 8% allocation if the overall theme allocation would exceed the maximum weights given in the table 1.

For example, even a high-risk portfolio could not get five themes with an 8% position in each. The 8% positions sizes would be reduced so that the overall theme allocation has a maximum weight of 20% within the portfolio.

 

Who decides when to sell a theme?

 

You are responsible for when you sell out of a theme position. However, in extreme cases if we deem the risk of a theme to be getting too high, we may exercise our discretion to remove a thematic fund – in which case it would become a mandatory sell. We would expect this to be a rare scenario and notify you in advance.

 

How often can I change my themes?

 

The themes we make available are designed to be held for the medium to long term. Short term trading is often counterproductive, and we discourage this.

We currently permit four changes of theme or themes per year, free of charge (although again we recommend they should be held for longer). Each subsequent theme change within the year will be subject to a £50 trading fee.

 

What themes are currently available?

 

As of May 2018, we have the following themes available:

 

Global Infrastructure
Global Bank Securities
Ethical Corporate Bonds
Ethical Equity
Emerging Markets Bond
Global Insurance
Global Technology
Global Sustainable
Commodities
Latin America Equities
US Small Companies
China Growth
Indian Equities
Health Care
Clean Energy
Automation & Robotics
Financial Equities
Global Water
Ageing Population

 

The above themes can be combined in thousands of different ways to create a portfolio.

Note: as referenced above, the themes available will vary depending on risk level.

 

Outlook for Thematic Investing

 

Thematic investing is expected to continue to evolve, as asset managers look to create more differentiated offerings. More and more themes will have investable funds created around them, and we will continue to research the marketplace for appropriate new themes to add to the Tiller offering.

 

Disclaimer:

The views contained herein are not to be taken as a recommendation or advice.  Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. A mandatory sell of a theme may result in a taxable capital gain or loss.  All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.  It is very important to do your own analysis before making any investment based on your own personal circumstances.  You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on Tiller’s website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.  It should be noted that investment involves risks, the value of investments may fluctuate in accordance with market conditions and investors may not get back the full amount invested.

 


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