Michael BaileyRemember when they used to talk about ‘set-and-forget’
retirement investment strategies? Well, the time-honoured 70:30 is looking like
another victim of these ridiculous times. “Take your strategic asset
allocation, tear it up, sit down with a clean sheet of paper and a pencil. And
an eraser.”

That was the advice of Pippa Malmgren, an economic policymaker for
no less than the George W. Bush White House, at a DB Advisors-sponsored Fund
Executives Association luncheon last month.


In Pippa’s mind, at a time where strikes
and riots are back, all the

Ukraine’s
ATMs have run out of cash, and sovereign defaults are set to become everyday,
you’re a fool to sit back and think that what worked for the last twenty years
is going to work for the next twenty.

You need to get your portfolio a theme,
says Malmgren. She’s got a couple that only seem outrageous when last year’s
investment committee minutes aren’t lying in tatters at your feet. One of them
is inflation. Yes, you read that right. Not of the demanddriven kind, but price
rises that happen only when a lack of credit has choked off the ability to add
any supply.

Commodity plays will be early beneficiaries of the related price
hikes, Malmgren says. Her other theme is private equity (remember those guys?).
Somebody has to repair the broken balance sheets, and Malmgren gives it about
three years before some bourse, somewhere, plays host to an IPO.

“And I don’t
care what it is, what industry it’s in, I will buy that first IPO because the
amount of negativity it will have been through, the number of people telling
them ‘IPOs don’t exist any more’, means that the quality of that IPO, by
definition, will be extremely high.” An individual’s opinion is one thing.

But
when Watson Wyatt – one of the biggest gatekeepers in Australia – comes out in
a client note last month and says no fund should automatically rebalance to
their SAA, you know the days of ‘set-and-forget’ really could be numbered.

However,
I think the most important role for consultants over the next few months will
be filtering the apocalyptic messages being directed toward their clients’
investment committees.

Pippa Malmgren was no doubt just dramatising a point,
but SAAs are a big ship to turn around and funds should not throw out the ‘rule
book’ lightly. Getting in on the ground floor of the next commodities boom, or
private equity’s renaissance, are great ambitions but at most they will be
satellite plays for super funds.

And no-one will buy them if they’re 2 and 20. Cheap,
transparent and measured exposures to traditional asset classes, capable of
generating cashflow, will be favoured by trustees more now than they have been
for years – because suspicious members understand them. Simplicity. Set and
forget.

 

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