Brendan Swift asks just how much the industry has learned some six years after the market catastrophes that defined 2007-08.
The global financial crisis (GFC) forced the wealth management industry to reconsider long-held tenets about portfolio construction and the role of strategic asset allocation.
Full In Focus feature, Eye on the asset pie, available here.
The world economy is beginning to recover and the US Federal Reserve has begun tapering – reducing its market-supporting bond-buying program, known as quantitative easing (QI) – presenting investors with a new set of challenges.
“Tapering is an example of the seismic events that have been going on since the GFC; and to us it is a perfect example of why strategic asset allocation has to change a lot more,” says Mark Wills, head of State Street Global Advisors (SSgA) Investment Solutions Group for Asia Pacific ex-Japan.
“For example, we look at a lot of institutional funds – they have the same asset allocation they had before the GFC, they had the same asset allocation during the GFC and they had the same asset allocation after it. If they did move it, moving it a couple of per cent didn’t really move the dial.”
More active approach
Strategic asset allocation forms the bedrock of modern portfolio theory: by diversifying across various asset classes, risk (more precisely defined as volatility) can be substantially lowered. However, diversification proved little defence against plummeting asset prices across the board and has since prompted investors to question their previous strategies.
Wills says investors need to take a more active approach to asset allocation, particularly to manage equity market volatility. SSgA is a key player in asset allocation services, managing about $95 billion in strategic asset allocation accounts and about $32 billion in tactical asset allocation accounts – where short-term shifts are made more often to try and take advantage of market mispricing.
The lessons from the GFC may have fine-tuned the approach of institutional investors, but it has not overturned them, according to head of investment outcomes at JANA Investment Advisers, Steven Carew. Most balanced institutional funds maintain their 60-70 per cent allocation to growth assets, such as shares and property; and new strategies, which vary between funds, remain at the margins while true short-term tactical asset allocation strategies are rarely employed.
“They don’t have the skills to do it and consultants tend to take a longer-term approach because doing shorter-term trading is not how we’re built; and the governance structure of super funds doesn’t really allow them to take a tactical approach,” Carew says.
Stronger Super legislation has forced institutional investors to both justify and report to the prudential regulator the impact of asset allocation decisions, while return targets are moving toward more measurable targets – something which is being mirrored in the retail sector.
“A trend we’re seeing in our side of the industry at the moment is this shift from strategic-asset-allocation-based funds to more objective-based investment strategies,” says executive manager investment sales at Colonial First State (CFS), Laird Abernethy, noting a rise in the number of products that aim to outperform the rate of inflation, rather than a more volatile market index.
“There’s a lot of noise and product proliferation around those strategies,” he says.
Full In Focus feature, Eye on the asset pie, available here.
