Alpha plays don’t come much purer than GTAA, but the user experience so far has been mixed, as CATHERINE JAMES discovers.
Global tactical asset allocation (GTAA) has never been an entirely new-fangled investment style. It has morphed into the strategy it is today over some 30 years. Broadly speaking, it means taking a short to medium term look at markets across the globe, and taking bets on comparative value, both between countries and within countries, of equity markets, bond markets and currency.
The volatile, and more or less leveraged strategy has huge potential upside, and equally fantastic downside. Today funds that wear a GTAA badge are classed as hedge funds, although they are arguably more readily embraced than some hedge fund strategies as they not only generate absolute returns, but they are usually transparent, are easy to evaluate at any point, and in most cases, are providers of instant liquidity.
Managers operating a solely GTAA strategy grew as the practice of using tactical asset allocation across an investor’s entire investment pool diminished. In other words, instead of a fund slightly adjusting its strategic or long term distribution of assets to take advantage of short-term changes in the markets, specialist managers were given a small amount of the total capital to invest across a variety of global markets, assets classes and currencies.
GTAA managers, which tend to be divisions of well-resourced global institutions, operate in different ways but somewhat systematic processes, using derivatives to pairs-trade, are a common theme. Mellon’s GTAA fund, for example, does not invest in commodities, emerging markets and inflation-linked bonds, nor does it select stocks or take style or sector bets. Its main decisions typically are 30 per cent stocks versus stocks, 30 per cent bonds versus bonds, 30 per cent currency and only 10 per cent stocks versus bonds. An allocation to such a manager can tilts a fund’s asset allocation at the margins without having to revisit the long-term plan each time.
But the big-name GTAA funds appear to be quietly closing to new investors, as quietly as GTAA evolved. Mercer chief investment officer Russell Clarke says it’s not easy to access a good manager in this field, and furthermore most of them are close to capacity. “There aren’t a lot of managers that have really good credentials around these sorts of processes,” he says. “It’s not like you can go out tomorrow and put a swag of money away because a lot of the good ones are already closed or close to closing.”
But should a strategy like GTAA really matter to a long term investor anyway? Does tinkering constantly at the margins matter in the long run? There seems to be only one word to answer that. Alpha.
The pundits are unanimous that beating market returns is the key for any long term investor whether it takes a short, medium, or long term strategy to do so. The other feature of a GTAA fund is it holds out the possibility of stellar performance where traditional investments do not. Its low correlation to equities and fixed interest can make it an attractive diversifier.
Industry superannuation fund Asset Super made its first foray into GTAA territory in May this year, splitting $55 million of its total $1.6 billion three ways between the GTAA funds of AQR, Mellon Capital and Barclay Global Investors. Asset chief investment officer John Paul says the board deliberated for some time before deciding to invest in the funds. “To be absolutely honest, we have a board who are fairly suspicious of hedge funds in the broad sense, but the global tactical asset allocation funds were recommended by Intech,” Paul says.
No other hedge funds hold a dollar of Asset’s capital, but the board was reassured by the recommendation from Intech given its deep research into the GTAA market. “The board saw it as an opportunity to put its tail in the water on hedge funds,” Paul says. “It’s a thematic investment. It’s across currencies and countries and the like so it behaves differently to stocks and those markets, so it’s a bit of a diversifier as well.” The performance, however, has varied across the three managers since May, and has Paul “both happy and unhappy”. “There’s been ups and downs – one [fund] does well while others don’t do so well, then that one does well while the others don’t. But that’s to be expected,” he says.
Intech, meanwhile, appears to simply be happy. Little more than a year ago it opened a fund of GTAA funds called the Global Tactical Strategies Trust (GTS). The consultant issued a media release to draw attention to the GTS’ returns over the volatile first quarter of the 2007 financial year.
While the general market was going under, GTS was buoyant. For the three months of June to August this year, while the MSCI World Index was getting deeper into negative territory, GTS was on a gradual incline. But the following month, September, the roles were reversed. Such behaviour is somewhat expected. And besides, the total return for the year to September 29, 2007 ended up at 16 per cent.
Intech head of alternative investments Michael Coop says there are four underlying managers (which he says can only be named for clients). They are not sharing equal portions of the $190 million currently in GTS from a number of Intech clients. Four GTAA funds in the Intech fund, three funds share Asset’s $55 million: the message is that diversifying within the diversifier is essential. Even for its relatively small allocations, one GTAA manager is not only not enough, it’s too risky.
Coop says the Intech fund has selected four managers that compliment each other. Clarke from Mercer says the GTAA strategy works better as a package: “They can at times have big losses – these are at the aggressive end of strategies the institutional investor might use – so it’s important to have good diversification. I’d never hire just one GTAA manager.” Leo de Bever, chief investment officer of Victorian Funds Management Corporation, would rather not award money to a specialist manager at all. It’s not that he does not believe in the GTAA strategy – on the contrary – it’s simply he would rather see a fund do it internally. Also he is skeptical of a GTAA manager which claims it can time or predict the markets – a key plank in the GTAA ‘sell’ argument. “You can’t time markets, anybody who thinks they can time markets over a six or twelve month or two year basis is probably dreaming,” he says.
De Bever says that for a large superannuation fund – even half the size of VFMC’s $41 billion for argument’s sake – a small allocation of say $200 million in a GTAA fund would probably not be relevant to the overall alpha generation in the long term. But that shouldn’t deter such a fund from making its own TAA decisions, such as taking some foreign exchange exposure or changing the asset mix exposure in a certain direction.
He says the key to such decisions is to let them be played out over longer periods of time than what the label “tactical” suggests. “One of the arguments against doing tactical asset allocation is that it requires a fair bit of skill assessing risks that are far from unambiguous in terms of time horizon. A truly long term investor should be able to sustain short term adverse consequences from taking positions that may take some time to come to fruition,” he says. “But there is a tendency after a year or so to say, why did we do that? It isn’t paying off. But sometimes it takes two, three, four years for some strategies to be validated.”
He concedes, however, if you don’t have the internal resources, you might appoint an external GTAA manager, although it may not be as effective as it would be more difficult to make meaningful tilts across all the asset classes.