“It worries me a bit that there are loads of people in the market now saying: ‘we do DAA’ when they’ve not done it before,” she says. “People want to be careful, because it’s a very different skill set. It’s not like going out and picking managers.” Despite the well-known fact that it is a fund’s asset allocation, rather than the manager selection, which drives the overall return, the superannuation industry has traditionally focussed heavily on manager selection and asset class construction – particularly Australian equities – within the portfolio. Simon Doyle, head of fixed income and multi-asset at Schroders, says directing some of the super fund’s research budget to thinking about the proper alignment of the asset allocation of the portfolio with the fund’s investment objectives is time and money well spent. “If we can get 10 per cent better at getting the positioning of the portfolio right it will have a much bigger impact on the performance of the portfolio than getting the manager selection slightly better,” he says. However the industry’s historical focus on stock and manager selection has left a gaping hole in the talent pool, Doyle says. “There are not a lot of institutions and people within those institutions that have the ability to do [asset allocation],” he says.
“You need to be good at building portfolios across assets. Lots of people are good at building equity or debt portfolios, but not a lot of people have an understanding across a broad array of assets and are able to manage risk within that context.” Trafford-Walker says that in many ways, it’s like going to a surgeon for a specialist operation. “You want someone who’s done this before because if you get it wrong it can have a big impact on the portfolio,” she says. “A decision to change your asset allocation even by 5 per cent to and from equities will make a huge difference, for example.” The big question for many funds when deciding to implement DAA is who should take responsibility for the task: consultants, specialist managers, fund staff or investment committees? Ultimately responsibility always lies with the investment committees and trustees to deliver the best possible outcome for members, but Robert Swift, head of multi strategies at BT Investment Management, says there should always be a threeway communication between the consultant, fund manager and super fund.
“The trustees should understand what they’re getting themselves in for with respect to the risks they’re going to be taking on; the consultants should be there to make sure that the board understands what they’re doing and the manager is being given clear instructions on what is and isn’t permissible; and the manager should be responsible for the return and managing the risk,” he says. “A functional investment process would allow all three parties to jointly participate in setting the expected return and risk framework. “The accountability for delivering performance rests with the manager. The accountability for setting the framework for risk lies with the people who own and are responsible for the assets, which is the trustees of the fund. That accountability is much greater and clearer if the trustees understand through a dialogue with the manager and consultant what they believe is the likely market environment of the future.” The difficulty with delegating the DAA decision is the tendency for funds to have multiple consulting relationships, rather than one adviser that oversees the entire fund assets.