People are doing a lot of things a bit differently these days. They’re spending a little more time with their kids, for instance. According to the trashy magazines, they are also being a little more patient/ understanding with their spouses. They’re also being a little more cautious with their spending. Blame it on the GFC. In the running of super funds, things have changed a little too. Risk controls, clearly, are being discussed with more passion at board and lower levels. And relationships with most service providers have been reassessed. For some, asset allocation processes may have altered, with consultants being given more, or less, power to make decisions. But has anything really changed that much? And will the little which has changed last that long?
For super funds, an area of probably enduring change is happening in the way trustees look at their asset allocation. Strategic asset allocation has long been the responsibility of the board, with advice from its consultant. With the advent of tactical asset allocation in the 1990s and more recently dynamic asset allocation – which fits somewhere between tactical and strategic – the boards have been willing to delegate some of the responsibility. There are two fundamental shifts occurring with asset allocation which were encapsulated at last month’s round of Mercer client conferences in Sydney, Bejing and Hong Kong. One is a move away from the traditional placement of assets into asset class buckets which were thought to equate to a rough 70:30 growth:defensive split. The second is a move away from the traditional benchmarking of the world equity markets to better reflect GDP shares and growth rather than just listed equities.
Mercer’s Australian CIO, Russell Clarke, who runs about $16 billion in master trusts and other funds, says the firm is likely to move towards a risk premia-based asset allocation approach, although it doesn’t want to make the leap too suddenly. The approach is intuitive, he says, but it represents a big change from the status quo. Under this approach, asset classes and subclasses are assigned ratings from ‘high’ through ‘moderate’ to ‘some’ in terms of the risk premia attached. The various premia include quantitative factors, such as equity premia, small cap, credit, liquidity and so on, as well as quantitative risk factors, such as leverage and political risks.