Don’t let the DAA, TAA or SAA dominate the overall risk budget.” One of the fundamental principles behind Russell’s EAA discipline is “first, do no harm”, Pease says, adding that Russell would prefer to “miss out” than go into a position that proves damaging to the portfolio returns. A historical opponent of TAA, Pease says there are fundamental differences between TAA and EAA. “It differs to TAA in that our preference is to do nothing,” Pease says. Inherently, TAA is an alpha process, not a risk management process, adds Greg Liddell, head of investment consulting at Russell.

“Russell is very strong on risk budgeting, and for a given risk budget we believe there are better places to spend that,” he says. Whatever the process, governance is recognised as a critical element of a successful DAA program. Funds must have clear governance structures in place to be able to implement DAA in an appropriate manner and Liddell says any DAA decision should receive board level approval. “If you tilt away from the SAA it’s appropriate that there’s a person within the super fund that has the technical ability [to implement the tilt] and can do so in a timely fashion,” he says.

They must also have an exit strategy in place when taking a DAA tilt, to stop them from “falling in love” with the position, Pease adds. But governance is important not only in the ability to make and implement decisions efficiently, but in the ability to bear some peer-relative risk in the short term, according to Watson Wyatt’s Chee. “At the base level we think a robust and well informed analytical framework is the key starting point,” he says. “You need judgement and experience of working in investment markets, cognisance of what happens in different market environments to be able to work out how much weight to give to the different indicators you’re getting in. “Clearly opportunities can come and go very quickly and similarly opportunities can come and generate value over a three to five year horizon, but you may suffer a bit of pain before you get there. “[You need to] maintain conviction in the positions you put in place initially and the framework that led to those decisions and your belief that you will generate excess return over the timeframe you specified.”

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