The biggest investment decision facing institutional investors now, as always, is their asset allocation. Academics and other researchers can dispute the precise importance of asset allocation – be it 80 or 90 per cent of return or a bit more or a bit less. But everyone gets the picture – it’s a lot. One of the benefits of the GFC is that it has prompted a rethink of both the way funds go about thinking of their asset allocation and the time and resources they put into it. If a recent roundtable of fund CIOs and consultants is a guide, the best thing that a fund’s board can do is to think about the various ways that it can approach the broad topic of asset allocation and put these into some sort of context of the culture of the fund, level of riskaversion of members, and liabilities’ profile.
It is an increasingly interesting question as to who should make the asset allocation decision. The traditional framework is that funds split their portfolios into the general growth/defensive categories and thereafter into individual buckets of equities, bonds, real assets and other alternatives. In a world where the knowledge gap between board and management is widening, shouldn’t the board then hand over the decision on strategic ranges to the fund’s investment staff to make? Or is the AA decision too important for the board not to have a view? And if the board does have a view, why doesn’t it put more resources into the decision?
Something’s wrong here As was reiterated both at last month’s roundtable, held both in Sydney and Melbourne, as well as at the Fiduciary Investors’ Symposium in Manly a few days earlier, funds spend perhaps tens of millions of dollars on fees to fund managers who look to provide incremental value above the standard indices, and only a few hundred thousand on getting expert advice on AA at the board level. The roundtables were organised by Colonial First State GAM in conjunction with FEAL. Like many FEAL events, they were held under Chatham House Rules, with only the general themes and discussion points for public consumption afterwards. One clear theme was that there are few right or wrong answers but rather what could be deemed appropriate given all the factors which go to make up a super fund.