Dynamic asset allocation has become increasingly popular among pension and sovereign wealth funds as a top-down tool to generate alpha and mitigate risk in the face of changing market conditions. However, not every asset owner believes in the approach’s value-add.

Some common criticisms of the approach include difficulty in timing markets and increased transaction costs. Recently, the chief investment officer of a top US pension fund, the US$225 billion ($320 billion) Teacher Retirement System of Texas, also called DAA a “low-breadth activity” for alpha generation, compared to which security selection is a more consistent approach.

But successful cases of implementing DAA, such as the strategic tilting program at NZ Super, demonstrate its persistence as a source of excess return: the program is by far the biggest alpha driver for the fund and added close to 100 basis points of active return annually over the past five years, according to the fund’s 2025 report.

The belief of the $98 billion HESTA, whose DAA program dates back to 2017, is that the portfolio management approach shares the same underlying logic as stock picking.

In one of the first interviews since he joined the fund, general manager of dynamic asset allocation Michael Blayney says that if an investor believes in market inefficiencies on a micro level to the extent that they take active positions in specific stocks or allocate to active managers, “it’s not really a big stretch” to take advantage of that on a macro level.

“If you can maintain a good process and good disciplines, there’s absolutely value in active asset allocation as much the same way as you can argue in security selection, it’s just the natural extension of that logic,” Blayney tells Investment Magazine.

“Obviously it’s important to retest your assumptions and processes and ensure you have a robust team amid regime change. But equally, it requires a lot of situational awareness and discipline to be successful in active asset allocation.

“We’ve seen plenty of times when you see a market panic and then a rapid snap back, so there’s clearly opportunities for disciplined investors.”

Blayney joined the health industry fund in April 2025 and currently reports directly to chief investment officer Sonya Sawtell-Rickson, following the departure of head of portfolio design Dianne Sandoval to become CIO at the Maryland State Retirement and Pension System in the US.

The DAA program at HESTA serves a dual purpose of adding alpha and managing risks over the long-term, rather than being purely return-focused. It has returned positively since inception, though Blayney declined to comment on specifically how much the program contributed to the fund returns, due to confidentiality around performance attribution. The program runs on a three-to-five-year time horizon.

“Most SAA is anchored in 10 years plus, you might have some more medium-term strategic tilts which might be five-year plus. The DAA is not really short-term, but having said that, if we buy something and it converges to our fair value in six months, we will take profits,” Blayney says.

The fund’s DAA approach is heavily valuation-driven and complemented by taking views on macroeconomic factors like cash rates which is important for things like bonds’ fair value, but it tends to stay away from trend-following strategies.

“One of the main reasons is that just inevitably trend followers will tend to miss the turning point,” Blayney says.

“The trend followers will work well if markets fall and keep falling for a long period of time, but they won’t work very well in a period where we see rapid V in markets – like we saw with Liberation Day, like we saw with COVID. No strategy will work perfectly in every environment, but for us there’s the fund objective… of that downside resilience as well as value creation.”

This is combined with relatively small position sizes whose ultimate goal is to make subtle adjustments rather than drastically change investment options’ risk profiles.

HESTA bought Australian dollars in the immediate aftermath of Liberation Day last year when the currency at one stage fell to around 60 cents – with the currency’s ensuing recovery Blayney says it is one instance where “contrarian buying” added some incremental value for members.

“The old marketing slogan of ‘it’s time in the market, not timing the market’ – a lot of that rhetoric is designed to discourage people from making what I call the undisciplined knee-jerk reaction,” he says.

“We operate a very collaborative process. The CIO is in all of our decision making around DAA and we have a weekly DAA meeting.

“You have to stick to your guns when things are going against you.”