“Trustees have to keep this in perspective and not think of it as a magic bullet,” he says. “The last 18 months have been traumatic for funds; member balances have declined in a way many thought unimaginable. There’s been a lot of interest because of what’s happened, but funds must remember that the absolute majority of returns come from strategic allocations. There’s clearly a hierarchy here; the strategic asset allocation comes first, and we believe there’s a strong case for additional return through active management. [Enhanced asset allocation (EAA)] is in addition to both of those.” Gareth Abley, head of asset consulting at MLC Implemented Consulting, says the debate over set-and-forget versus strategic tilting is “still a second order issue”. “Medium – term asset allocation matters – maybe a lot if the ranges are big – but it’s important people don’t lose sight of the fact that the factor that has the biggest impact on returns and risk is still the neutral strategic allocation,” he says. “The risk is that people will compete in the returns generated by these ‘stractical’ processes.
If you do that, you lose the purity of what you’re trying to do.” Rather than debate the merits of one strategy over another, Abley says the debate needs to move on to focus on the relative quality of the different processes. “It’s just like the old debate around active and passive management,” he says. “There are merits to both, but once you’ve decided you’re going active, the key is which provider is likely to do it better.” Indeed, processes vary widely depending on the foundation of the firm that’s offering the service. For example the version of DAA being pushed by most traditional asset consultants is vastly different to that being offered by funds managers in the space. Schroders uses a DAA approach for its Real Return Fund, which aims to deliver an investment return of 5 per cent per annum above Australian inflation over rolling three-year periods.
Unlike super funds, which take DAA tilts away from their SAA, Schroders is not operating in a benchmarkrelative space, so decisions are made according to how much absolute risk the manager wants to take in a given asset class. Doyle says the way DAA is being used by some consultants and super funds is not really that different to TAA, with a slightly more mediumterm tilt. “There is this idea that permeates the industry that equities go up and if you want decent returns then you need to have the bulk of the risk in your portfolios invested in equities,” he says. “Our view is that sometimes that makes sense but sometimes it doesn’t and DAA is about continually evaluating in effect the risk premium that’s available across asset classes and shifting the risk within the portfolio to reflect where that risk premium lies, in the context of our investment horizon.” In this sense, Schroders is attempting to build an objectives-based portfolio made up of assets that are best placed to meet that objective, rather than having a fixed allocation to equities and bonds and tinkering around the edges. Colonial First State Global Asset Management (CFSGAM) also adopts an objectives-based approach to investing for its institutional clients.