Active Managed Instruments

INTEGER WEALTH GLOBAL - ACTIVE MANAGED INSTRUMENTS

Active Managed Instruments

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Dear Reader

An Active Managed Instrument is a financial instrument or investment structure in which portfolio composition and investment exposures are actively managed by authorised investment professionals according to a defined investment mandate, risk framework and investment objective.

Active management aims to achieve the stated investment objectives but does not guarantee investment performance. The value of investments can fall as well as rise, and investors may receive back less than they originally invested.

This active approach includes:

• Continuous market monitoring

• Dynamic asset allocation

• Diversification across sectors and regions

• Risk management and exposure controls

• Regular portfolio rebalancing

• Ongoing identification of investment opportunities

It is a professionally managed investment vehicle in which qualified investment managers continuously monitor, analyse, and adjust the underlying portfolio with the objective of achieving specific investment goals while managing risk.

Unlike a passive investment, which typically tracks a market index with little or no intervention, an Active Managed Instrument allows investment professionals to make informed decisions about:

• Asset allocation

• Security selection

• Risk management

• Sector exposure

• Geographic diversification

• Portfolio rebalancing

The manager actively responds to changing market conditions, economic developments, and investment opportunities rather than simply following a predetermined benchmark.

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Benefits of an Active Managed Instrument

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1. Professional Portfolio Management

An Active Managed Instrument is overseen by experienced investment professionals who continuously analyse markets, economic conditions, and investment opportunities. This allows investment decisions to be made based on current market intelligence rather than a static strategy.

2. Dynamic Market Response

Unlike passive investments that simply track an index, active management enables portfolio adjustments in response to changing market conditions. This flexibility can help position investments to take advantage of emerging opportunities and changing economic trends.

3. Risk Management Focus

Professional managers actively monitor portfolio risk and can adjust asset allocations when market volatility or economic uncertainty increases. This approach aims to help maintain a balanced investment strategy aligned with defined objectives.

4. Access to Specialist Expertise

Investors benefit from the knowledge, research capabilities, and market insights of a dedicated investment team. This expertise can be particularly valuable when navigating complex global financial markets.

5. Opportunity Identification

Active management seeks to identify investments that may be undervalued, overlooked, or positioned for future growth. Continuous research allows managers to evaluate opportunities across different sectors, regions, and asset classes.

6. Strategic Asset Allocation

The portfolio can be adjusted to reflect changing economic environments, investment themes, and market conditions. This flexibility helps ensure that the investment strategy remains aligned with evolving opportunities and risks.

7. Ongoing Monitoring and Oversight

Active Managed Instruments are regularly reviewed to assess performance, risk exposure, and market developments. This continuous oversight helps maintain an investment approach that is responsive and informed.

8. Diversification Benefits

By investing across multiple asset classes, sectors, and geographic regions, an Active Managed Instrument can provide broad diversification. This helps reduce reliance on the performance of any single investment.

9. Potential for Enhanced Returns

The objective of active management is to outperform relevant benchmarks through informed investment selection and tactical decision-making. While outcomes cannot be guaranteed, active strategies seek to create additional value through professional management.

10. Time-Saving for Investors

Investors can benefit from professional oversight without needing to constantly monitor markets or conduct extensive research themselves, allowing them to focus on their personal and business priorities.

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How Risk is Actively Managed

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Risk management is a core component of an Active Managed Instrument. Rather than simply holding investments and waiting for market movements, professional managers continuously assess and adjust the portfolio to help manage potential risks and protect long-term investment objectives.

Continuous Market Monitoring

Investment managers monitor economic conditions, market trends, interest rates, geopolitical events, and company performance on an ongoing basis. This allows them to identify potential risks early and respond when necessary.

Portfolio Diversification

Risk is reduced by spreading investments across different asset classes, sectors, industries, and geographical regions. This helps minimise the impact that any single investment or market event may have on the overall portfolio.

Asset Allocation Adjustments

Managers can increase or decrease exposure to specific asset classes depending on market conditions and economic outlook. For example, they may reduce exposure to higher-risk assets during periods of heightened uncertainty and increase allocations to more defensive investments.

Security Selection and Due Diligence

Each investment is carefully researched and assessed before being included in the portfolio. Ongoing analysis helps identify investments that may no longer meet the portfolio's objectives or risk criteria.

Liquidity Management

Managers ensure that the portfolio maintains appropriate levels of liquidity, helping to provide flexibility to react to market changes and meet investment requirements efficiently.

Exposure Controls

Active management includes monitoring concentration risk by setting limits on exposure to individual securities, sectors, regions, or investment themes. This helps prevent the portfolio from becoming overly reliant on a single source of performance.

Regular Portfolio Reviews

The portfolio is reviewed frequently to ensure it remains aligned with its investment strategy, risk profile, and market environment. Adjustments can be made whenever conditions change.

Disciplined Investment Process

Professional managers follow structured investment and risk-management frameworks designed to support consistent decision-making and help avoid emotional reactions to short-term market volatility.

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Actively Managed Risk Oversight

Our investment team continuously monitors market conditions and portfolio exposures to help manage risk proactively. Through diversification, strategic asset allocation, rigorous investment research, and ongoing portfolio reviews, we seek to identify and address potential risks before they significantly impact the portfolio. This active approach allows the portfolio to adapt to changing market conditions while remaining focused on its long-term investment objectives.

Risk management techniques are designed to help manage investment risk but cannot eliminate it entirely. The value of investments can fall as well as rise, and investors may receive back less than they originally invested.

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Exposure Controls: A Key Pillar of Active Risk Management

Exposure controls are the measures used by investment managers to prevent a portfolio from becoming overly concentrated in any single investment, sector, country, asset class, or market theme. Their purpose is to reduce vulnerability to adverse events and create a more balanced risk profile.

Why Exposure Controls Matter

Without exposure controls, a portfolio can become unintentionally concentrated. While concentrated positions may generate higher returns if an investment performs well, they can also lead to significant losses if that investment, sector, or market experiences a downturn.

For example, if 40% of a portfolio were invested in a single technology company, a negative earnings announcement or regulatory action could have a disproportionate impact on the overall portfolio value.

Active managers seek to avoid this by implementing predefined exposure limits and regularly monitoring compliance.

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Types of Exposure Controls

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1. Single Security Limits

Managers set maximum allocations to individual securities to ensure that no single holding can materially damage the portfolio.

Example:

• Maximum exposure to one company: 5%

If a holding appreciates beyond this limit, the position may be reduced and profits reallocated elsewhere.

Benefit: Reduces company-specific risk such as management failures, litigation, fraud, or earnings disappointments.

2. Sector Exposure Limits

Managers monitor exposure across sectors such as:

• Technology

• Healthcare

• Financials

• Energy

• Consumer Goods

• Industrials

• Example:

• Technology sector maximum exposure: 20%

• Financial sector maximum exposure: 15%

If a sector becomes overvalued or faces increased risks, exposure can be reduced.

Benefit: Protects the portfolio from sector-specific economic, regulatory, or market shocks.

3. Geographic Exposure Controls

Investments are allocated across regions and countries to reduce dependence on a single economy.

Examples:

• United Kingdom

• United States

• Europe

• Asia-Pacific

• Emerging Markets

Managers establish limits to balance regional opportunities against regional risks.

Benefit: Helps shield the portfolio from localised recessions, political instability, currency fluctuations, or regulatory changes.

4. Asset Allocation Controls

Exposure is managed across different asset classes, including:

• Equities

• Bonds

• Cash

• Alternatives

• Property-related investments

Example: During periods of market uncertainty, equity exposure may be reduced while allocations to defensive assets are increased.

Benefit: Creates a more balanced portfolio capable of responding to changing economic conditions.

5. Thematic Exposure Controls

Active managers monitor exposure to investment themes and trends.

Examples:

• Artificial Intelligence

• Clean Energy

• Infrastructure

• Cybersecurity

• Healthcare Innovation

Although these themes may offer growth opportunities, excessive concentration can increase risk.

Benefit: Allows participation in long-term growth trends without becoming over-reliant on a single narrative or market trend.

6. Currency Exposure Management

For internationally diversified portfolios, currency movements can influence returns.

Managers may:

• Limit exposure to specific currencies.

• Diversify currency holdings.

• Use hedging strategies where appropriate.

Benefit: Reduces the impact of adverse foreign exchange movements on portfolio performance.

7. Liquidity Exposure Controls

Managers assess how easily investments can be bought or sold without significantly affecting market price.

Benefit: Ensures the portfolio maintains sufficient flexibility to respond to market events and investor requirements.

How Active Managers Monitor Exposure:

Exposure controls are not set once and forgotten. Professional investment teams continuously monitor:

• Position sizes

• Sector allocations

• Geographic exposure

• Asset-class weightings

• Currency risks

• Correlations between investments

• Overall portfolio volatility

If allocations move outside predefined limits due to market movements, the portfolio can be rebalanced to bring exposures back within the desired risk framework.

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Exposure Controls

A fundamental aspect of our risk-management process is maintaining disciplined exposure controls. We carefully monitor and limit exposure to individual investments, sectors, regions, asset classes, and investment themes to help avoid excessive concentration risk. Through ongoing oversight and regular portfolio rebalancing, our investment team seeks to maintain a well-diversified portfolio that can adapt to changing market conditions while remaining aligned with its long-term objectives.

Exposure controls are designed to help manage investment risk but do not eliminate the possibility of loss. The value of investments may fall as well as rise, and investors may receive back less than they originally invested.

Portfolio Rebalancing

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Rebalancing is the process of adjusting a portfolio's holdings to maintain the desired investment strategy and risk profile. As markets move, some investments will outperform while others underperform, causing the portfolio's asset allocation to drift away from its intended targets.

Active managers regularly monitor these changes and make adjustments to keep the portfolio aligned with its objectives.

Example:

Suppose a portfolio is initially invested as follows:

• 60% Equities

• 30% Bonds

• 10% Cash

Over time, strong stock market performance might increase the equity allocation to 70%, while bonds and cash fall proportionally.

The portfolio would now carry more risk than originally intended.

To rebalance, the manager may:

• Sell a portion of the equities

• Reinvest proceeds into bonds or cash

• Restore the target allocation

After rebalancing:

• 60% Equities

• 30% Bonds

• 10% Cash

The portfolio is once again aligned with its agreed strategy and risk parameters.

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Why Rebalancing Is Important

Maintains Risk Discipline

When markets rise strongly, investors can unintentionally become overexposed to higher-risk assets. Rebalancing helps prevent risk levels from increasing beyond acceptable limits.

Prevents Concentration

A single investment, sector, or region may grow to represent too large a proportion of the portfolio. Rebalancing reduces excessive exposure and maintains diversification.

Locks in Gains

Rebalancing often involves trimming positions that have performed strongly. This can help capture gains and avoid excessive dependence on past winners.

Identifies New Opportunities

Capital released from outperforming investments can be reallocated to areas that offer more attractive valuations, income opportunities, or growth potential.

Supports Long-Term Investment Objectives

Rebalancing ensures short-term market movements do not cause the portfolio to drift away from its long-term strategy.

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Types of Rebalancing

Strategic Rebalancing

The portfolio is adjusted back to predetermined target allocations.

Example:

• Equity target: 60%

• Equity rises to: 68%

Manager reduces equity exposure and restores the 60% target.

Tactical Rebalancing

Managers may adjust allocations based on market conditions, economic outlook, or investment opportunities.

Example: If economic indicators suggest increased volatility, the manager may temporarily reduce higher-risk exposures and increase allocations to more defensive assets.

Threshold-Based Rebalancing

Adjustments occur when allocations move outside predefined ranges.

Example:

• Target equity allocation: 60%

• Permitted range: 55% to 65%

• If equities exceed 65%, rebalancing is triggered.

Active Management Advantage

In an actively managed instrument, rebalancing is not purely mechanical. Investment professionals consider:

• Market conditions

• Valuation levels

• Economic trends

• Interest rate expectations

• Sector outlooks

• Portfolio risk metrics

This allows rebalancing decisions to reflect both risk management considerations and potential investment opportunities.

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Active Portfolio Rebalancing

As markets change, the composition of a portfolio can drift away from its intended strategy. Our investment team continuously monitors asset allocations and portfolio exposures, making adjustments where necessary to maintain an appropriate risk profile and investment focus. Through disciplined rebalancing, we seek to preserve diversification, manage concentration risk, and ensure the portfolio remains aligned with its long-term objectives and market outlook.

Rebalancing does not guarantee profits or protect against losses. The value of investments can fall as well as rise, and investors may receive back less than they originally invested.

How Sector Limits Are Calculated

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Sector limits are determined through a combination of risk analysis, portfolio objectives, market conditions, and diversification requirements. The goal is to ensure no single industry has the potential to disproportionately affect overall portfolio performance.

1. Start with the Portfolio's Risk Profile

The first consideration is the risk tolerance of the investment strategy.

For example:

• Conservative portfolio: 5% to 15% maximum per sector

• Balanced portfolio: 10% to 20% maximum per sector

• Growth portfolio: 15% to 30% maximum per sector

A higher-risk portfolio may accept greater concentration in sectors with stronger growth potential, while a lower-risk portfolio typically maintains tighter controls.

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2. Analyse Historical Sector Volatility

Investment managers evaluate how volatile each sector has been historically.

For example:

Sector Typical Risk Level

• Utilities Lower

• Consumer Staples Lower

• Healthcare Moderate

• Industrials Moderate

• Financials Moderate to High

• Technology High

• Energy High

More volatile sectors may receive lower maximum allocations than sectors with more stable earnings and cash flows.

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3. Measure Correlation Risk

Managers assess how sectors interact with one another.

For example:

• Technology and Telecommunications may move similarly.

• Energy and Utilities may respond differently to economic cycles.

• Consumer Staples often behave differently from Consumer Discretionary stocks.

If multiple sectors are highly correlated, exposure limits may be reduced to avoid hidden concentration risk.

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4. Compare Against Market Benchmarks

Many managers use major indices as reference points.

Example:

If a broad market index contains:

• Technology: 28%

• Healthcare: 13%

• Financials: 12%

The active manager may choose to:

• Cap Technology at 20%

• Increase Healthcare to 15%

• Reduce Financials to 10%

The benchmark provides context, while exposure limits reflect the manager's risk outlook and investment convictions.

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5. Calculate Contribution to Portfolio Risk

Modern portfolio management focuses not just on allocation size but also on risk contribution.

For example:

Sector Portfolio Weight Risk Contribution

• Technology 15% 25%

• Utilities 15% 8%

• Healthcare 15% 12%

Although Technology represents only 15% of capital, it may generate 25% of the portfolio's total risk because of higher volatility.

Managers therefore often set limits according to both:

• Capital allocation

• Risk contribution

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6. Apply Stress Testing

Professional investment teams model hypothetical scenarios such as:

• Recessions

• Interest-rate shocks

• Oil price collapses

• Regulatory interventions

• Geopolitical events

The potential impact on each sector is measured, and exposure limits are adjusted where necessary.

For example: If a stress test indicates that a 25% allocation to Financials would significantly increase downside risk during a banking crisis, managers may set a lower sector limit.

Example: Sector Limit Framework

An actively managed diversified portfolio might set guidelines such as:

Sector & Maximum Exposure

• Technology 20%

• Healthcare 15%

• Financials 15%

• Industrials 15%

• Consumer Staples 15%

• Consumer Discretionary 15%

• Utilities 10%

• Energy 10%

• Materials 10%

The limits are designed to prevent excessive concentration while allowing managers flexibility to pursue opportunities.

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Sector Exposure Management

Sector limits help ensure the portfolio remains appropriately diversified and is not overly dependent on any single industry. Our investment team establishes maximum exposure levels for each sector based on factors including market conditions, risk assessments, historical volatility, economic outlook, and portfolio objectives. These limits are continuously monitored and reviewed, helping to manage concentration risk while maintaining flexibility to capture investment opportunities across a broad range of industries. Through regular oversight and rebalancing, sector exposures remain aligned with the portfolio's overall risk-management framework.

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