In Australia, the GFC now seems to have been a long time ago. Some of us still wake occasionally with a start, but with functioning capital markets, liquidity and close-to-full employment it has become easy to forget the troubles that still exist in the rest of the world. For investors overseas, the reality of the crisis is still in their minds. However, sufficient time has now elapsed to enable them to think about the implications for the future. The Research Foundation of the CFA Institute is a not-for-profit organisation established to promote the development of practical, timely and relevant research for investment practitioners around the world. In late 2010, the foundation published a monograph dealing with investment management after the global financial crisis.
Led by the highly respected Professor of Finance at Yale, Frank Fabozzi CFA, the team interviewed 68 institutional investors, consultants, fund managers and academics to research how the financial crisis affected and will continue to affect investment management decisions as well as the industry itself. Two areas in particular that dominated the discussion: asset allocation and risk management. It is worth reflecting on these and how they might relate to local conditions. The importance of asset allocation is possibly the major theme to (re-) emerge. It was back in 1991 that Brinson, Singer and Beebower’s influential paper confirmed that, on average, more than 90 per cent of the variation of returns over time is explained by asset allocation decisions.
Bet a volatility It is easy to see that no amount of alpha could compensate for the beta volatility of the GFC. This was when, as we know, bonds outperformed equities by more than 50 per cent in a year. Yet despite this, for whatever reason, there has been a marked emphasis on manager selection over asset allocation in the past decade or so. (I’m yet to see any ‘Asset Allocator of the Year’ awards, for example). Looking forward, the research points to strong growth in the demand for asset allocation advice, as well as asset allocation strategies such as unconstrained multi-asset class mandates with absolute return objectives. Part of this will naturally involve dynamic asset allocation (DAA). It would have been hard to have missed the rapid growth in the popularity of this idea over the past two years or so.