“There are also clearly identifiable potential losers among managers,” he said. Picking the winners required in-depth analysis of quantitative versus qualitative assessments and understanding the timeframe, insight and universe restrictions of the managers. While capacity was an important issue, this was not as simple as measuring the manager’s funds under management. Alpha decay occurred at different market capitalisations or turnover depending on the underlying strategy. “The concentration among Australian superannuation funds might mean active management can have less impact,” he said. “However, 250 bps-plus per annum outperformance, which is possible, is worth the effort.” Adam Schor, client portfolio manager for mathematically based US manager Janus Capital, said that with each stock selection there was a reduction in the likelihood of the manager adding alpha. Placing controls on tracking error might limit the effectiveness of managers and their ability to use their skills, Schor said. It tended to force managers to ignore the total risk of the portfolio and therefore create a sub-optimal risk/return trade-off.
Crunch opens door on new debt opp ortunities Looking at market developments, Paul Hatfield, the managing director of Londonbased Alcentra, an affiliate manager of BNY Mellon Asset Management, said the credit crunch created new opportunities in the emerging asset class of leveraged loans and mezzanine debt. Comparing the investment characteristics of loans compared with bonds, Hatfield said bonds showed significantly higher volatility. They had lower recovery rates than loans and their longer duration made them more sensitive to movements in the yield curve. He said the record levels of issuance in 2006–07 had tailed off sharply following the financial crisis, but outstandings remained at record levels with low rates of prepayments. Loans were one of the bestperforming asset classes last year, with the US S&P/LSTA loan index up 51.2 per cent over calendar 2009 and the European S&P multi-currency loan index up 43.8 per cent.
Alternative beta: the next steps With the big jump in passive investment by pension funds around the world as a reaction to the global crisis – notwithstanding the arguments that the volatile environment benefitted active managers – has also come an increased sophistication in beta management. Eric Brandhorst, director of research at State Street Global Advisors’ (SSgA) global structured products group in Boston, said there were various ways investors looked to depart from the market allocation of capital – or capweighted indices – in a systematic fashion. They could take factor tilts, use optimised strategies, riskreduction strategies and emulation strategies. The main factor tilts are valuation, volatility, beta, size momentum, quality and leverage.
