“The reason is, the way the governance structures work within a lot of institutions it’s difficult for them to implement change at an asset allocation level in a timely manner within the portfolio,” he says. “Outsourcing all or part of that decision improves the ability of the fund to capture those shifts in risk premium. If it’s internalised, the difficulty is making the changes.” However not all funds are convinced of the benefits of DAA – or outsourcing the asset allocation decision. HOSTPLUS does not do DAA, nor does it automatically rebalance back to its SAA targets. Rather, the fund is happy to let its position drift from the SAA for long periods of time where it believes there is merit in doing so. “We don’t do DAA in the sense that we don’t give it out to a third party to do and we don’t have anything that’s programmed or prescriptive but we are happy to move away from the SAA when we see value in certain asset classes over others,” says Sam Sicilia, chief investment officer at the fund. “Those moves ought to be few and far between and we have to have a certain degree of conviction in order to do it.”
Sicilia sees DAA as a variant of global TAA, but says trustees and trustee boards typically don’t have the skills to do either process themselves, forcing them to delegate to a provider. “Our view is that we would rather have very few intentional tilts away from SAA, so do it rarely,” he says. Sunsuper rebalances its SAA on a daily basis, but adopts more of a tilting strategy whereby its managers have discretion to tilt the portfolio where they feel the markets are deviating from the mean. “DAA is a case of the CIO and his team changing the SAA on a more regular basis to reflect the short-term outlook for the markets,” says Tony Lally, chief executive officer at Sunsuper. “The concern we have about that is we really don’t think it’s appropriate because markets don’t always move in a rational way and you can get it very wrong.”
Lally understands the logic behind DAA, but like HOSTPLUS, says Sunsuper prefers to take smaller bets such as a view on the Australian dollar. “SAA is really based on long-term expectations and at any point in time you probably have more information about the immediate future than the long term and that’s why some people justify DAA,” he says. “However markets can stay irrational for very long periods of time, so trying to second guess the market by DAA at the macro fund level we think increases the risk in the portfolio.” To tilt or not to tilt? All of those offering medium-term asset allocation services emphasise that the SAA remains by far the most important decision for a super fund. The development of DAA represents an “evolution in thinking about the optimal ways of managing portfolios”, but is not the panacea that would have saved funds from the GFC, Russell’s Pease says.