“People have underestimated how much China is growing,” said Lewis South, chief economist of Macquarie Funds Group. “The emerging economies are the new engines for global growth.” The structure of relative growth between the developed and the developing world had changed for a decade because of the crisis, said Michael Hasenstab, co-director and fixed interest portfolio manager for Franklin Templeton in the US. There would be multiple reserve currencies in future, not just the US dollar, and the renminbi (China) would be one of them, he said. And Patrice Conxicoeur, director of Asia Pacific and head of institutional business for HSBC Global Asset Management, said: “China offers excellent value for long-term investors, despite short-term market volatility.
The renminbi is the only currency which has remained stable through the crisis. The crisis is a golden opportunity for Chinese companies.” He added, however, that valuations were “stretching the friendship” while not yet being in “bubble territory”. On the other side of the new world order, Chris Wallis, a senior portfolio manager of Vaughan Nelson in the US, said the next major crisis was likely to be in the currency markets, brought about by potential defaults in developed world debt. “The US is bankrupt, “ he said. “The Government can’t repay its debts and will have to renegotiate them. About US$5 trillion has to be raised over the next 12 months to fund global deficits.” Wallis said that the investment industry was not prepared for a market with shifting macro-economic fundamentals. There was excessive diversification in each asset class and managers tended to rely on historical correlations.
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.
“The current opportunity appears to be great but investors should be patient. Be patient or be passive,” she said. Ross Barry, of Watson Wyatt, said that the industry was on the cusp of becoming a buyer-dominated market. “We’re on the verge of another wave of reductions in fees,” he said. “I think fees are still too high, especially in some sectors of the market.” Barry said that of the agency issues that funds had with their service providers, such as the “sales machines” of larger funds management firms, asset consultants possibly represented a bigger issue.
“It’s important to challenge your consultant on how active risk should be taken around the portfolio.” John Moore, of Russell Investment Group, emphasised more effective implementation of active management decisions as a way to add extra alpha. He said there were four main areas funds could save money through better implementation: reducing turnover through emulation strategies and reducing taxation through propagation, which could save 30-50bps in shares; audit and control the “opaque” pricing of foreign exchange dealings, which could save 6-18bps; the use of professional transition managers who could save a market impact of 60-180bps per event; and more efficient rebalancing within reduced bands, which could add 10- 20bps a year at the fund level.
