Russell Investments has joined a host of implemented consultants and multi-managers who have launched medium-term asset allocation strategies in recent months in an attempt to capitalise on “unsustainable” market movements.
Russell’s new Enhanced Asset Allocation (EAA) service seeks to identify relative opportunities within asset classes using forecasting models spanning 11 regions and 11 asset classes.
“As the last two years have demonstrated, the markets can move in extremes, and these extremes can represent real investment opportunities,” said Pete Gunning, Russell’s global chief investment officer.
“Unlike other asset class timing approaches, Russell EAA provides a disciplined, structured and high-conviction approach for investors to respond to markets that are at very likely unsustainable levels.”
Gunning said EAA would live within the context of strategic asset allocation, automatic rebalancing and risk budgeting.
“Our clients should understand this suite of services as a sophisticated and innovative means toward adding incremental returns that should never fundamentally alter their strategic asset allocation,” he said.
MLC recently rolled out its Strategic Overlay, which uses the firm’s scenario analysis to make changes to the asset allocation when the risk-reward trade off is perceived as asymmetric, to its institutional clients.
The Strategic Overlay has been applied to its Long Term Absolute Return Portfolio (LTAR) since December 2005, and according to MLC has added 7.5 per cent per annum since then.
Many traditional asset consultants, such as Frontier Investment Consulting and Watson Wyatt, claim to have been using dynamic asset allocation with institutional client portfolios for many years.
Watson Wyatt recently produced a paper on what it calls Dynamic Strategic Asset Allocation (DSAA) claiming an allocation of between 5 and 15 per cent of a fund’s risk budget to DSAA for a three-or-more-year timeframe could produce an expected increase in returns of 1 to 1.5 per cent per year above the strategic allocation.
Russell said EAA can work by identifying a significant disequilibrium between asset classes. For example, last year when the Australian dollar was 40 per cent above its equilibrium levels versus the US dollar, real interest rate differentials were at record highs and momentum filters such as commodity prices were turning negative.
Likewise, Russell says its strategists identified a dislocation between global corporate credit and global sovereign bonds early this year.
As part of its portfolio management approach, Russell is encouraging institutional clients to maintain a “strong adherence to their strategic asset allocation and to undertake deviations from the strategic benchmark only with a full awareness of its impact throughout the portfolio.”