Soon after investment returns began to correlate in the panic of the financial crisis, the practice of dynamic asset allocation (DAA) staged a revival. With no clear, longrunning trends to be seen, it was believed that making medium-term tilts to exploit undervalued sectors of the market or to seek a safer place to invest money was the smartest thing to do. No clear and long-running market trend was visible. Asset consultants such as Mercer and MLC, who were driving forces behind the DAA comeback, advocated that funds rethink their long-term strategic weightings and devote some capital to executing mediumterm tilts, of three-to-five years, that could take advantage of undervalued sectors of the market. For some, the acronym DAA wasn’t precise enough, and soon the terms strategic and tactical were combined to create ‘stractical’. Some investment chiefs said dynamic tilting was nothing new. As CIO at Telstra Super, Steve Merlicek, says he first executed a tilt in 2002.
Now the investments chief at IOOF, Merlicek has been harnessing the strong Australian dollar to buy offshore equities since the late 2010. In the December/ January issue of Investment Magazine, he dubbed the adherence to a strategic asset allocation (SAA) as the “jellyfish approach” to investing: performance was more likely to rise, fall and drift with the movements of the market. Now, there are further signs that funds are not content to set, and stick by, long-term SAAs. The CIO at the $37 billion AustralianSuper, Mark Delaney, says the fund does not believe in rigid, set-and-forget asset allocations, and has abandoned its rebalancing policy and invested new cashflows more opportunistically. The big fund receives about $266 million in contributions each month. By not rebalancing to its strategic weights, its asset allocation has shifted over the months as the flows have been invested chiefly in growth assets as it aims to maximise returns.
At the BT-owned multimanager, Advance Asset Management, underlying funds managers are mandated to pursue opportunities in their asset classes worldwide. Head of investment solutions, Patrick Farrell, says this decision was made to take advantage of the rife short-termism in the market, manifesting in risk-on, risk-off trades. The noise in global markets is ceaseless, he says. At a recent briefing, he noted that some hedge funds were monitoring the flows of information throughout social media websites as a proxy for sentiment in societies. “This noise is a danger and an opportunity,” he says, and warrants an agile, tactical approach. Paraphrasing a funds manager he met on a recent global study tour, Farrell says the investment game is no longer about searching for exclusive insights into a company. Amid the on-going data deluge, how information is screened and analysed is more important. The challenges faced by societies at large – the Eurozone’s debt malaise, an end to money-printing by the US Federal Reserve and the Chinese authorities’ management of its rapid growth – should also inform dynamic approaches to investing, says David Stuart, head of Mercer’s DAA team. “The problems in each of the regions get bigger, rather than smaller.” He describes the uncertainty in global markets in a granular, rather than grandiose, manner: “It’s a grinding, sub-par recovery, with a fair amount of volatility along the way.” Buying global shares with the overvalued Australian dollar is one opportunity that has emerged so far.