Like big hair and tight jeans, the traditional balanced fund fell by the wayside in the 1980s as the sharp-suited specialists moved in. But with the prospect of high inflation and prolonged unstable markets not seen since those forgettable fashions, super funds are beginning to hearken back to a time when tactical asset allocation was part of the package. STEPHEN SHORE reports.
The concept of “set and forget” asset allocation is now redundant, according to Simon Doyle, head of fixed income and multi-asset at Schroder Investment Management. Schroder runs a number of what it has dubbed ‘CPI-plus multi-asset strategies’ that focus on risk rather than asset allocation. As risk premia move around, the portfolio shifts towards assets that give the greatest chance of achieving the desired return. “It is like a dynamic, strategic asset allocation,” Doyle says.
What differentiates this new paradigm from the old balanced model is that risk has become the most important factor, says Andrew Lill, director of investment strategy at Russell Investment Group. “The balanced funds of the 1980s were focused on maximising return, with one eye on risk,” he says. “Multi-asset managers use alternatives and financial engineering to minimise risk for a set objective.”
There are certain factors that are inherent in most portfolios, such as concentrated equity risk, Lill explains. Equity has profit-growth risk; portfolios tend to move in a cycle with corporate profits. “There are other aspects of the economy to consider,” he says. Multi-asset managers try to create a portfolio that will perform well in all economic circumstances. The goal of a multi-strategy solution, Lill says, is to aim for a certain level of risk and use leverage to reach it.
Doyle says CIOs spend too much time thinking about manager exposure over market exposure. “It is more important to be in the right market at the right time,” he says. “There may be times when the portfolio holds no equities. A super fund might have selected the best equities manager, but if equities are losing 20 per cent and its manager is only losing 18 per cent, does that really matter when the objective was inflation plus 5 per cent?”
Multi-asset mangers run scenario testing to look for factors that might affect the strategy that could be hedged, Lill says. “There are things that tend to affect all asset classes, such as high inflation, low economic growth, and low productivity growth. Generally speaking, a multi-asset portfolio might have a lower proportion of equities, bonds with leverage, and an overlay of property, but the allocation is not something that remains static.”