However, leading asset consultants seem to believe that one of the lessons from the crisis is that traditional strategic asset allocation is no longer appropriate – at least not in isolation. Rather, dynamic asset allocation should supplement the longer-term positions, and bands of movement before rebalancing takes place should be tightened. So, even if you think that China is the best place to park your money for the next 10 or 20 years, there are a host of other considerations to, well, consider. Fiona Trafford-Walker, the managing director of Frontier Investment Consulting, said the days of “set and forget” were over. Whatever you called the new level of asset allocation moves – which fits between tactical at the short end and strategic at the long end – funds needed to look at and react to medium-term signals and take profits where they appeared. She said that Frontier, and increasingly other consultants such as one-time TAA opponents Russell, believe that funds can be more active in the medium term and, by reducing rebalancing bands, can also pick up an additional volatility premium.
Medium-term signals included valuations, fund flows and sentiment. A good example was the run-up of the Australian dollar last year, which presented a strong signal that it was overvalued and that hedging positions should be reduced. Trafford-Walker said: “It’s not about short-term market timing … It’s very hard to be a good seller. You need to learn how to sell… We used strategic asset allocation with a set of capital market assumptions. A three-year review cycle was common. Dynamic asset allocation asks: ‘What’s the environment? What are relative valuations?’ Dynamic asset allocation reviews regularly, whereas tactical asset allocation changes regularly.” She told the conference of 350 delegates (a record for this event which has a capped audience) that super funds needed to decide what mattered most when they assessed risk for their portfolios. “Is it the chance of not being able to meet your financial obligations? Is it the chance of not achieving real returns?
Is it the chance of a total loss of capital?” Trafford-Walker said that funds should move to a factor-based assessment of risk, rather than asset class based. However this needed sophisticated systems and “a lot of common sense”, she said. “With portfolio construction, it’s not clear to me that the old way is totally busted,” she said. “It’s been the worst environment for 80 years.” In another session at the conference, three asset consultants defended the ongoing use of active managers, with some qualifications. Anna Shelley, of JANA Investment Advisers, said stock dispersion was relatively high and this tended to coincide with high alpha for managers. “The current environment is very good for active management,” she said. There were clear inefficiencies in some areas of the markets but opportunities varied over time.