Forget shuffling between equities and bonds. As the underlying causes of market volatility become more complex, so do the tactical asset allocation tools used to manage and exploit it. AMANDA WHITE and SIMON MUMME report.
The complexity and unpredictability of recent market movements are being reflected in asset allocation debates throughout the country’s superannuation investment committees. AustralianSuper, for one, is allocating all of its inflows in to cash, and chief investment officer Mark Delaney says that will continue until “we think there is a better place to put it”. While not aiming to hit a particular allocation target, the cash component of the $30 billion fund was sitting at 6 per cent last month.
How funds should react to the recent market turmoil is a question up for serious debate. At a recent Watson Wyatt roundtable, senior investment consultant, Tim Unger, said super funds reactions should be closely linked to their governance capabilities, their internal resources, skills and decision-making framework. “Only funds that have strong governance, and the ability to think through potential outcomes, should react at this time. The potential for regret – doing something that doesn’t turn out to be correct – is quite high right now.”
Clayton Sills, QIC business relationship manager – strategy, says recently QIC has sought to diversify some of its larger clients’ longer-term asset allocations away from listed equities into alternatives and unlisted assets such as commodities, private equity and infrastructure. “At the same time QIC’s concern with the valuation of listed equities for the last year has resulted in a reduced weighting to equity markets. The combined effect of the time required to gain exposure to appropriately priced unlisted assets and underweighting equities due to valuations concerns is a relatively high allocation to cash – a good position to be in during recent equity market volatility.”
But while it is a time for funds to be cautious, it is also a time of opportunity, particularly for skilled managers. While AustralianSuper has historically managed its cash in-house, Delaney also believes overlays can have an impact if they are big enough. Traditional tactical asset allocation funds have played with equities and bonds, trying to pick changes in the market and adjust the ratio accordingly, but the role of relative bond and equities allocations is diminishing both in a performance and risk sense.
BlackRock Investment Management believes the market is too extreme and unpredictable for such a traditional approach to TAA, particularly at times like now when both equities and bonds are volatile. David Hudson, who heads up BlackRock’s asset allocation alpha fund, a pure alpha play which in the past has been used to add value to its own balanced fund, believes asset allocation in an equities versus bonds sense would be particularly difficult to manage at a time like this. “How to manage risk of positions is crucial, the relationship between equities and bonds is a valid area to take risk in but not the only risk. Where asset allocation used to add value, our opinion is that is not a good bet to try and time the equity versus bond play.”