Products & Services

In this chapter, we will research and document the range of investment strategies, associated investment vehicles, and other services that the firm offers.

Investment strategies

An investment strategy is simply an approach to investing in some area of the financial markets. Once an area of focus is chosen — such as the global stock markets, U.S. stock market, or European bond market — an appropriate market index is selected, which makes up the universe of available investments for the strategy.

For example, a investment management firm may decide to create a global equity strategy that focuses on investing in stock markets around the world. From the range of available market indices, they could choose the MSCI All Country World Index (ACWI) — a global stock market index that contains nearly 3,000 companies from around the world — as the investment universe for the strategy.

The five largest stock holdings in the ACWI, which are weighted by the company's market capitalisation, are shown in figure 1.

Stock name	Ticker	Market capitalisation (USD billions)	Index weight
Apple Inc	AAPL	$2,685.99	4.55%
Microsoft Corp	MSFT	$2,388.31	4.04%
Amazon.com Inc	AMZN	$1,229.00	2.08%
NVIDIA Corp	NVDA	$1,007.27	1.71%
Alphabet Inc (Class A)	GOOGL	737.16	1.25%

Next comes an important distinction: whether the strategy is active or passive.

Passive investment strategies

A passive strategy simply aims to replicate the portfolio of investments in the appropriate market index. If the global equity strategy from the previous example was created as a passive strategy, it would hold the same companies as the ACWI, in exactly the same weights — or as closely as is practical (the smallest weighted holdings are sometimes excluded from strategies that replicate an index with a large number of total holdings).

Importantly, market indexes are theoretical: they can't be invested in directly. Creating a passive strategy is a first step in making an index available for actual investment (the second is to launch an associated investment vehicle, which we will cover shortly).

Active investment strategies

In contrast to passive strategies — which simply recreate a market index — the portfolio managers of an active strategy select a portion of investments from the index that they believe have the best prospects.

Typically, an active strategy will have a set of guidelines in place: the number of holdings to be held in the strategy portfolio, a maximum size of any single holding as a percentage of the total portfolio, requirements for individual holdings (a minimum company size for stocks, or credit rating for bonds), and so on.

Working within the guidelines, portfolio managers use a defined investment process to select investments from the index to hold in the strategy portfolio (holdings may vary over time, as conditions change). The guidelines and investment process usually incorporates principles from the managing firm's overall investment philosophy.

Performance benchmarks

For both active and passive strategies, the market index is used as a benchmark to periodically compare performance against — passive strategies attempt to match the index performance as closely as possible, whereas active strategies attempt to beat it.

Lewisham's investment strategies

Lewisham Asset Management (our fictional investment management firm) offer a range of equity and fixed income investment strategies to investors, shown in figure 2.

Asset class	Strategy	Benchmark	Typical holdings
Equity	Global Equity	MSCI All Country World Index	30-40 stocks
	International Equity	MSCI EAFE Index	25-30 stocks
	US Equity	S&P 500 Index	25-25 stocks
Fixed income	Global Bond	Bloomberg Global Aggregate Bond Index	25-50 issuers

The firm's strategies are all actively managed: the firm's portfolio managers build concentrated portfolios of investments which are selected using a value-orientated investment process (all in line with the firm's overall investment philosophy). Their Global Equity Strategy, for example, holds between 30 to 40 stocks in the strategy portolio, selected from roughly 3,000 available in the relevant market index.

Investment vehicles

Investment strategies can't be invested in without an associated investment vehicle that gives investors something tangible to buy and sell. They allow a strategy to be "put into practice" — investments (stocks, bonds, or other securities) are selected according to a strategy, held within a vehicle, and actual investment results are delivered to those who invest in the vehicle.

Multiple investment vehicles can be associated with a single strategy, where each vehicle holds the same composition of underlying investments as the representative strategy portfolio (although there may be some slight variation due to customised portfolios or regulatory reasons). If changes are made to holdings within the strategy portfolio, these are usually applied across all investment vehicles associated with the strategy. Occasionally, a portfolio within a vehicle may be divided up into multiple sleeves, with each sleeve managed according to a separate strategy.

There are many types of investment vehicle, but for our purposes, we will focus on two: pooled funds and separately managed accounts (SMAs).

Pooled funds

A pooled fund is an investment vehicle in which money is pooled together from multiple investors to hold underlying investments chosen by the fund's investment manager in accordance with an associated investment strategy. Investors can purchase units of a pooled fund to access the associated strategy. Examples of pooled funds include mutual funds and exchange traded funds (ETFs).

When making an investment in a pooled fund, investors choose a share class from those made available by the fund's investment manager. While all investors in a pooled fund — no matter which share class they choose — own the same underlying pool of investments, each share class will offer some form of customisation. A full explanation of each investment manager's share classes are provided in regulatory documents.

UCITS funds

Pooled funds can be launched for investors within a single country (such as the United States), and also — if they are built with a UCITS structure — can be marketed and sold in multiple countries (most commonly in the European Union).

To launch UCITS funds, an investment manager must first set up a fund company domiciled in a country within the European Union (usually Luxembourg or Ireland, for infrastructure and tax reasons). Once in place, UCITS funds can be launched from within this corporate entity, with each fund known as a sub-fund of the fund company.

Making a UCITS sub-fund available for investment requires at least one share class to be created, and each share class must be registered for sale in the domiciled country of the fund company. Once approved, the UCITS framework allows a share class to be freely registered for sale in any other country within the European Union (called passporting) or through the usual application process for countries outside the European Union (i.e., no passporting is allowed).

Therefore, the availability of a sub-fund by country is determined at the share class level, and a document is usually maintained by an investment manager's operations team to record which countries each share class is registered for sale (a very helpful resource to ensure UCITS fund-related marketing activity is targeted correctly).

Share class options

In the United States, the only distinction between share classes is the amount of fees and expenses charged to investors. UCITS share classes offer more options, which include:

• Fees. Allows investors with higher sums of money to access lower fees.
• Distributions. Investors who require an income can choose to be paid out distributions from underlying fund investments. Alternatively, income can be retained within the fund and used to generate additional capital growth.
• Currencies. Because UCITS share classes are often available in more than one country, investors may appreciate being able to buy and sell a share class denominated in their local currency.
• Currency hedging. Fund managers attempt to minimise currency risks.

Each UCITS share class typically incorporates a combination of multiple options, with investment managers offering a variety of choices (some have more than 20 share classes available per fund). However, it's unlikely that all possible combinations of options will be made available, and there are no rules that dictate if any UCITS share classes must be made available as a minimum. Presumably, this decision is left to investment managers, who likely create share classes in expectation of client demand (for example, in popular currencies) or when they have been specifically requested (a potential client may request a new share class with a specific set of options).

Share classes have ongoing running costs, so those with low interest or a low amount of invested capital may be closed by the investment manager.

Importantly, although share classes can't be marketed in countries where they aren't registered for sale, professional investors can actually invest in any UCITS share class they wish — even those not registered in their country.

Separately managed accounts (SMAs)

Investors with enough money to invest (this amount is determined by each individual investment manager) can open their own account directly with an investment manager, who buys and sells underlying investments — according to the associated investment strategy — within the account.

This can have some potential advantages when compared to pooled funds:

• Direct ownership of underlying investments. With pooled funds, investors own a share of the investment vehicle, which in turn owns the underlying investments. With an SMA, the investor directly owns the underlying securities.
• Customisation. Unlike pooled funds, which can't be customised beyond the existing share class options, the associated strategy for a separately managed account can be customised for each individual account.
• Tax benefits. As the underlying investments are directly owned by the investor, there may be potential tax benefits by implementing tax-loss harvesting strategies.
• Transparency. More comprehensive and regular reporting for all underlying investments in the portfolio are available.
• Negotiable fees. Fees charged by the investment manager can be negotiated by the investor, and may sometimes be lower than actively managed mutual funds.

Fees

The primary source of revenue for investment managers is from the fees they charge for managing investment vehicles, usually specified as a percentage of assets and periodically taken out from the capital within the vehicle (occasionally, an additional performance fee is charged). As they are taken out of the vehicle's capital — and not billed separately to investors — investment performance of the vehicle is reduced by the amount of the fee each time it is charged.

Fees can vary quite widely across vehicles and share classes, but as a general rule, vehicles with lower fees come with a higher investment minimum requirement.

Lewisham's investment vehicles

Lewisham offer separately managed accounts (available to investors globally), US mutual funds (for US-based investors), and UCITS funds (for investors in a variety of countries within the European Union) — as shown in figure 3.

Each vehicle is associated with an investment strategy from figure 2.

Investment strategy	Investment vehicle
	Separately Managed Accounts (SMAs)	Pooled funds
		US mutual funds	UCITS funds
Global Equity	LAM Global Equity SMA		LAM Global Equity UCITS Fund
International Equity	LAM International Equity SMA	LAM International Equity Fund
US Equity	LAM US Equity SMA	LAM US Equity Fund	LAM US Equity UCITS Fund
Global Bond	LAM Global Bond SMA	LAM Global Bond Fund	LAM Global Bond UCITS Fund

The firm's US mutual funds, along with available share classes, are shown in figure 4.

Fund	Share class	Ticker	Fee (%)	Minimum investment amount
LAM International Equity Fund	Investor shares	LIEAX	1.00%	$5,000
	Institutional shares	LIEIX	0.75%	$1 million
LAM US Equity Fund	Investor shares	LUSAX	1.00%	$5,000
	Institutional shares	LUSIX	0.75%	$1 million
LAM Global Bond Fund	Investor shares	LGBAX	1.00%	$5,000
	Institutional shares	LGBIX	0.75%	$1 million

The firm's UCITS share classes offer several options to investors, as shown in figure 5.

#	Option	Code	Description
1	Fee	INV	Investor fee is charged (as set out in figure X)
		INST	Institutional fee is charged (as set out in figure X)
2	Distribution	Acc	Dividends and interest payments paid out by underlying fund investments are distributed to share class investors every quarter
		Inc	Dividends and interest payments paid out by underlying fund investments are kept within the fund and re-invested
3	Currency	GBP	NAV is priced in British Pounds
		USD	NAV is priced in US Dollars
		EUR	NAV is priced in Euros
		CHF	NAV is priced in Swiss Francs
4	Currency Hedging	Hedged	Minimisation of currency risk is attempted

Lewisham's naming convention for their UCITS share classes, which indicates which combination of options apply, is detailed in figure 6.

				1		2		3		4
Share class name	=	Sub-fund name	+	Fee	+	Distribution	+	Currency	+	[Hedged]

This naming convention allows investors to determine which options apply to a share class from its name. For example, the share class LAM Global Equity UCITS Fund - INST Acc USD (listed in figure 7) belongs to the LAM Global Equity UCITS Fund, has the institutional fee level (set in the firm's fee schedule in figure 8), keeps dividends and interest payments paid by underlying investments in the fund, and has its net-asset value (NAV) priced in US Dollars. It doesn't attempt to minimise currency risks (and there aren't any in this case).

Lewisham's available share classes for their UCITS funds, along with the countries in which they have been registered for sale, are shown in figure 7.

Share class name	ISIN	Countries registered for distribution*
		CH	DE	ES	FR	GB	IT	LU
LAM Global Equity UCITS Fund
INST Acc USD	LU1000000001
INST Inc USD	LU1000000002
INST Acc EUR	LU1000000003
INST Acc GBP	LU1000000004
INST Acc CHF	LU1000000005
INV Acc USD	LU1000000006
LAM US Equity UCITS Fund
INST Acc USD	LU1000000007
INST Inc USD	LU1000000008
INST Acc EUR	LU1000000009
INST Acc GBP	LU1000000010
INST Acc CHF	LU1000000011
INST Acc GBP Hedged	LU1000000012
INV Acc USD	LU1000000013
LAM Global Bond UCITS Fund
INST Acc USD	LU1000000014
INST Inc USD	LU1000000015
INV Acc USD	LU1000000016

Lewisham have domiciled their UCITS fund company in Luxembourg. Therefore, all their UCITS share classes of sub-funds that belong to this fund company were registered in Luxembourg before being passported to other countries as needed. This also means the share class ISINs (often used to search for share classes online) all begin with "LU" — as these first two letters indicate where the fund company is domiciled.

Investors can also open a separately managed account with Lewisham, using any of the firm's investment strategies as a starting point, which can then be customised for each individual account as needed. The firm has set a minimum investment amount of $25 million, and a (negotiable) fee of 0.50%, in their fee schedule shown in figure 9.

Share class currencies & hedging

Lewisham's share classes can be used to demonstrate how share classes priced in different currencies, and currency hedging, can work in practice (note, however, that this section is entirely optional).

For our example, we will use the LAM US Equity UCITS Fund, which is managed using the firm's US Equity strategy and holds underlying investments priced in US Dollars (USD) — the stocks of US companies. When a UCITS fund's underlying investments are all within a single country, the fund's base currency will typically match the currency of the underlying investments, and so the fund's base currency has also been set to USD.

Share class currencies

The first share class launched for the fund (ISIN: LU1000000001) is denominated in the same currency as the fund's base currency (USD). The share class net asset value (NAV) is calculated once per day, by dividing the total value of the investments held in the fund by the number of fund units.

Dividing the $100m of fund holdings by 10 million units gives a daily NAV of $10.00: investors can purchase or sell a unit of the fund at this price on that day. The NAV may rise or fall each day: if the fund's investments increase in value to $102 million, and the number of units stay the same, the NAV would change to $10.20 (an increase of 2%).

However, UCITS funds are aimed primarily at investors in the European Union, who will have a different local currency — such as Euro (EUR), Pound Sterling (GBP), or Swiss Franc (CHF). Therefore, at some point a currency exchange must occur between the USD share class and the investor's local currency (presumably made by the broker that handled the transaction, who may set a disadvantageous rate for the investor). For example, a UK-based investor's holdings in the fund's USD share class must at some point be converted to GBP.

Investment managers can make it more convenient for investors by offering share classes priced in their local currency (and presumably, they also use a better exchange rate for investors than brokers). Investment performance is also calculated in the relevant currency.

Lewisham offer a share class for the fund with a NAV priced in GBP, for UK investors (ISIN: LU1000000010). Roughly speaking, if the USD NAV is $10.00, and the USD/GBP exchange rate is 0.82, the GBP NAV would be roughly £8.20.

Currency hedging

To further complicate matters, currency exchange rates change over time. Therefore, the investment performance of the fund's GBP share class will deviate from the USD share class — even though they share the same underlying investments.

For example, if the fund's underlying investments rise in value by 2%, the USD NAV would rise by the same amount, as the investments are also priced in USD. But the performance of the GBP share class is also affected by changes in the USD/GBP exchange rate, so if the USD/GBP rate moved from 0.82 to 0.81 during the same period (the GBP weakens in value by 1.22% against the USD) investors in the GBP share class investors would receive a lower return of around 0.76%.

As shown in figure 8, the return of a share class can be split into two components: (1) fund performance in the base currency (e.g., USD), and (2) the change in value of the share class currency versus the fund's base currency, if they are different (e.g., USD/GBP).

Fund base currency	Share class currency	Fund return (in base currency)	Exchange rate change	Share class return
USD	USD	2.00%	-	2.00%
	GBP	2.00%	(1.22%)	0.76%
	GBP Hedged	2.00%	(0.02%)	1.98%

For investors who are uncomfortable with the currency risk, some investment managers offer currency hedged share classes, in which the fund managers attempt to remove the impact of exchange rate changes on the share class return (usually via currency forward contracts). Investors are able to buy and sell the share class in their local currency, but only receive the fund return component: the return of the underlying investments in their base currency. Note, however, that currency hedging is imperfect, and often can't remove 100% of the currency risk, so the performance of a hedged share class may sometimes be slightly affected by exchange rate changes.

Lewisham offer a GBP-hedged share class for the fund (ISIN: LU1000000012) in which currency hedging attempts to remove the effect of USD/GBP exchange rate on the share class return so it matches the return of the underlying investments in the fund's base currency — the same as the USD share class return. Figure 8 includes the return of the GBP-hedged share class, which was only 0.02% off the USD share class for the same period.

Note that more complex examples exist than those we've covered — funds can hold investments priced in multiple currencies, other types of currency hedging are attempted, and so on — but they are out of scope for this guide.

Model portfolios

Some investment managers offer a series of recommended portfolios constructed with pooled funds, called model portfolios. They are used by financial advisors to outsource the work of creating and managing their client's portfolios — including asset allocation, security selection, and rebalancing — so they can spend more time meeting with and growing their client base.

For each recommended portfolio, an initial asset allocation is set by the investment manager that aims to meet a desired level of risk or income. A relevant pooled fund, usually one managed by the same firm, is assigned for each allocation. As model portfolios tend to span major asset classes, this means the investment manager will need to have a pooled fund range extensive enough to cover each allocated asset class.

Some investment managers make their model portfolios available as a guide, where subscribers to the service are provided with regaular updates on portfolio allocations and performance, and sent trade updates when any changes to portfolios are made. Others make their model available for investment through advisor investment platform, which use separately managed accounts (SMAs), individually managed accounts (IMAs), and unified managed accounts (UMAs) to hold the pooled funds.

Lewisham don't offer model portfolios, but may launch some in the future.

Other services

Some of the larger investment managers offer a small number of services and solutions in addition to the direct management of investment vehicles, including portfolio & risk management software, outsourced chief investment officer (OCIO) services, record-keeping for pension plans, securities lending, and resources to help financial advisors with their practice management.

Lewisham don't currently offer any additional services.