“We think now while there might be a bit of bouncing along the bottom, and that it’s unclear exactly where capital markets are going in the short term, that it’s certainly time to take some of that dry powder and move back to a normal position.” The new investment building block, however, is a re-examination of what that normal position ought to be, with particular emphasis on adequate liquidity in case the situation doesn’t improve. According to Barron, there has to be a re-examination of all aspects of the portfolio, as a post-crisis agenda, which should start with how funds are allocated relative to their long-term and short-term needs. “For a fund’s long term needs you want to reaffirm what it is you are trying to accomplish and what are your key goals and objectives.
You have an 8 per cent return expectation, why? And what does it mean if you don’t reach it? Can you still rely on the long-term returns from asset classes that have been built into your assumptions in the first place?” One of the biggest changes, according to Barron, has been the recognition that over shorter time frames, the notion that assets will “get bailed out” by markets just by waiting for another 10 years is looking questionable. “So if you take a large part of the marketplace, foundations and endowments, as an example, they realise that a long-term approach to asset management focusing on virtually an infinite time horizon, could create a real liquidity problem in the short term. That did, for many, come as a surprise,” he says. “We feel pretty good because we have been talking to our clients for a long time about some of the things they thought were liquid might not be liquid in this difficult environment.” The investment director of AMP Capital Investors’ Future Directions multimanager funds, Sean Henaghan, agrees that liquidity has provided “one of the great lessons out of the crisis”.
The multimanager now asks its managers to model how long it would take them to liquidate their portfolios, with no more than 30 per cent turnover. “Never again do we want a situation where we don’t have a choice,” according to Henaghan, who has spoken previously of having to write “an $800 million cheque” to cover his global bond fund’s currency hedging as the $A plummeted at the height of the crisis. Short runs add up to ‘long run’ So, the fundamental change in the investment framework is a realisation that long-term expectations are a series of shorter-term events and expectations, and the path to that long-term goal should be mapped accordingly, Rogers- Casey’s Barron says. “Correlations over a long period of time between two asset classes might be low, but over a short time horizon they might be high, and what are the implications of that on for example liquidity, can you write the cheques you want to?” he says.
“In a sense everyone makes investment decisions every quarter, do I rebalance, where am I now and where do I want to be. I know what I want to look like in 10 years and here I am today and how do we reflect where we are today in my longer term view. While beta was at everyone’s back that was a pretty easy decision to make, they are harder to make now and you have to have a framework for how you make those decisions. Does that mean you hire global tactical asset allocators to help you? Not necessarily, but that is a choice people are examining.” If there was a silver lining in this crisis, Barron believes it is the reexamination of fundamental investment questions.
The simple, but pertinent, active versus passive debate, is one such re-examination that a lot of funds are undertaking. “Investors are looking at what worked, what didn’t and why. There is a re-examination that maybe there were some managers that have been successful for long periods of time because all they really did was buy dips, lower priced securities and let the market bail them out. As a strategy without intelligence it isn’t really much of a strategy. Those are the kinds of re-examinations that this kind of a crisis bring. If you can say there’s a silver lining, that’s a silver lining,” he says. But he believes it is not just reexamining the active versus passive, but re-examining the whole asset management community.
“How they are operating and what they are doing, they have all had beta at their backs, now they don’t. It’s back to basics and fundamentals.” The RogersCasey house view is that it’s easier to get alpha in some places than others, and these naturally should be the areas of focus for investors. Generally, small is easier than larger, parts of growth and value are easier, global is an approach that allows much more opportunity than regional or country investing, and emerging markets create a great opportunity as an asset class and an active opportunity. Accordingly, the RogersCasey alpha research team is divided into four groups: equity oriented, income focused, real and inflation oriented, and opportunistic.
“Finally this is a time where a good solid understanding of fundamentals and companies, and doing credit analysis will benefit you. It gets back to the work being done,” Barron says. And consulting firms are not exempt from the scrutiny and pressure the asset management firms are under. There is pressure on fees, pressure from clients being unhappy with their portfolios, and more pressure on fundamental research. “For those firms with less robust research capabilities it is an issue. They will have to broaden their horizon. You can’t think you have four people covering hedge funds and five covering large cap value, you can’t think like that because the lines are blurring. You have to have a more nimble approach,” he says. “We don’t think the boutique approach of looking at asset managers works anymore. You have to look across asset managers and ask the fundamental questions of where can I find the best alpha, the best return sources for more clients.”