Fiduciary investors can do more to mitigate investment risk and seek returns than develop well-thought-out strategic asset allocations. SIMON MUMME reports.

Steve Merlicek, CIO at IOOF Holdings, says mak­ing medium- to long-term investment calls is “part of the job of managing money”. On the subject of investments, fund members and stakeholders have told him: “You’re the pros, we expect you to do it,” he says.  IOOF’s recent adoption of the strategic tilting service offered by Russell Investments, its asset consultant, sees Merlicek continue to make investment calls outside long-term allocations.  He says the tilts help create a “dynamic strategic asset allocation” enabling IOOF to respond to and attempt to exploit these extreme market valuations, and have more levers to pull than manager selection and rebalancing to strategic weights.  “I don’t subscribe to the jellyfish approach,” he says.  Tilting can be used both to enhance returns or either to lower risk.

“You could say that when things are extremely undervalued, it could be return-seeking, and when things are extremely over-valued, it could be risk reduction.”  “We’re not doing tactical. It’s medium- to long-term tilting: taking positions when asset classes are at extreme levels.”   Merlicek began tilting in 2002, during his long tenure as CIO at Telstra Super, in concert with Paul Laband. (Laband was a consultant at the then Towers Perrin and later worked for UniSuper as head of strategic tilting. He joined Wingate Asset Management’s investment committee late last month).  Some of Merlicek’s tilts at the big corporate fund included shifting 30 per cent of the its international equities’ exposure to emerging markets when they entered a cyclical decline, and carving 8 per cent off its Australian equities allocation in late 2007 so that it stood at 28 per cent of funds under management.

Now, the newly merged United Funds Management and IOOF MultiMix portfolio is shifting more capital to international equities managers on the back of the soaring Australian dollar.  “It could be just a currency play, but I also want to get the income of the assets. You can buy certain blue-chip US stocks on 3-4 per cent yields with strong balance sheets at reasonable valuations.”  The tilt is being executed within the core-satellite framework of the fund’s international equities manager line-up, in which large developed markets are accessed through passive exposures and some high-alpha, high-conviction managers chime in with specialised strategies.  The risk with this tilt is the volatility of the A$, which is strongly linked to commodity prices and has been viewed by international investors as a proxy for China’s economic surge.  But it also makes Merlicek think about other parts of the IOOF portfolio.

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