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German institutions eye tactical asset allocation

GERMANY - German institutional investors are increasingly focusing on the possibilities for tactical asset allocation (TAA) within their portfolios.

“What we are seeing in the market is that there is a very large interest in TAA,” says Klaus Esswein, State Street Global Advisors’ managing director, based in Munich.

“You find immediate interest among clients and potential clients when you present the idea of TAA,” he adds. SSGA won a 400 million-euro mandate earlier this year, which involved use of the technique. “We have just gained a 300 million-euro mandate from another client and there are several more in the pipeline.”

Esswein attributes the interest in part to the limited risk budgets that many insurance and pension funds are working with at the moment, particularly under the stress-test rules of the regulator. “With the volatility in the market it makes sense to look at TAA overlays,” he adds.

SSGA has an established track record in TAA and is offering the service on an overlay basis or as an advisory service, whether or not the group is involved with the underlying assets, he says.

Many investors have been attracted to portfolio protection insurance arrangements since the bursting of the bubble. But Esswein comments: “We do not think they are particularly helpful as they did not enable investors to participate in the market rises.”

Another group active in the TAA marketplace is Merck Finck Invest, also based in Munich, where managing director Josef Kaesmeier confirms the interest that the market is showing in asset allocation products.

“I think this is a reflection that people are no longer interested in just a purely equity or a bond product, particularly in the small to medium sized funds that five years ago would have been invested in a balanced fund,” he says.

The group has offered a TAA fund since 1979 and the track record shows an outperformance of 0.8% per annum over 10 years and 0.9% pa over five years, net of transaction management and other costs, with an information ratio of 0.2 to 0.5, says Kaesmeier. “The model we have developed just makes the classical switch between equities and bonds.”

More recently, Merck Finck has developed the ‘best of two’ tactical portfolio approach with consultants Alpha Portfolio Advisors.

“During the year, you have a ‘pro-cyclical asset allocation’ so as equities rise you increase the equity proportion and vice versa. But at the end of the year you rebalance back to your initial asset split.” The aim is to go up with the market, but not to follow the market down to the same extent.

The asset manager is looking at developing additionally a TAA overlay product.

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