UK - The move from balanced fund management could result in investors losing out an important source of absolute returns, Helena Morrissey, chief executive officer of Newton Investment Management, said.

Since the bear market there has been increased focus on achieving absolute returns, which meant obtaining positive results irrespective of the direction of the market or asset, she said at a London symposium.

“It is ironic that there was a move from balanced management, where managers have the relative freedom to invest across asset classes, at the same time. One way of achieving absolute returns may be being ignored.”

She believes that “a modernized version of the unfashionable balanced approach” is a very valid strategy to obtain absolute returns. The approach required seeking outperformance and having minimum exposure to bear markets in individual asset classes.

Looking at longer-term market returns, she pointed to the sizeable contribution reinvested dividends made in equity returns – a source not necessarily available to pension funds. She also pointed to the considerable volatility of both equities and gilts over different periods.

“In our view active asset allocation where carefully designed is simply the best efforts to achieve the best return you can on a risk adjusted basis from pension funds,” said Morrissey. “We are looking for volatility on a short-term basis. Our best efforts require flexibility.”

She referred to increased specialization in portfolios. This brought manager diversification, which made it difficult to benefit from any contribution from asset allocation. “Who is looking after the asset allocation mix?”

“Manager of managers in our view add more fees and increase obscurity and lack of transparency about where the returns and risks are coming from,” she said.

“I think it is very intuitive that multi-asset portfolios that can incorporate that flexibility on an ongoing basis between asset classes offer much scope for utilizing our best ideas and delivering returns,” said Morrissey.

She was speaking at an institutional investment symposium organised by Mellon Global Investments (MGI). Newton is one of Mellon Institutional Asset Management's 12 fund management subsidiaries, whose products and services are distrbuted by MGI.