How does ‘new balanced’ asset management work in practice? Allianz Global Investors’ (AGI) product Global Vision provides one example.
Global Vision is the brainchild of Lee Thomas, a managing director of PIMCO and the head of its international portfolio. Thomas got the idea when PIMCO, 70% owned by Allianz, absorbed the fixed income business of Dresdner RCM, acquired by Allianz in 2001. This included a number of traditional balanced mandates.
Thomas decided there was nothing wrong with the principle of balanced mandates, but that its implementation had gone seriously wrong.
He suggested that traditional balanced managers were looking to add alpha through asset allocation rather than risk budgeting. He proposed putting risk budgeting at the centre of a new balanced management process.
In June 2003 Allianz Dresdner Asset Management (ADAM) launched ADAM Vision (now Global Vision) with two Luxembourg SICAVs, a global and European product. The European product is managed with 50% global equities and 50% Euro fixed income/. The global produce has 50% global equities and 50% global fixed income. Both are hedged in Euros.
Until recently management of Global Vision has been shared between Thomas, responsible for investment management and fixed income strategy, and Wolfram Gerdes, responsible for risk management and equity strategy.
However, Gerdes left AGI in January, and his role has been taken by Peter Lockyer, head of portfolio risk and performance, and Eric Bartholon, a member of Allianz’s Global Policy Committee.
Allianz Global Investors constructed Global Vision from its five existing investment platforms - PIMCO, RCM, Nicholas Applegate, Oppenheimer Capital and NFJ Investment Group. This enables a high degree of diversification of sources of value added, says Lockyer
“The basic concept of the product is to take numerous small measured positions. It doesn’t rely on one or two big hits, swinging for the home runs. Instead, the score is built up by a lot of singles and doubles.”
There are three elements to the product: a fixed income element, managed by PIMCO; an equity element managed by the equity managers on the Allianz platform; and a ‘completion portfolio’.
The completion portfolio is the cornerstone of Global Vision’s new balanced process, says Lockyer. The portfolio has three roles. The first is alpha porting. “If you want to transfer alpha from a manager whose remit is slightly outside the benchmark for the product, you can do that by taking away his market risk and adding back the particular benchmark risk that you wish to capture,” he explains.
The second role is handling ‘anomaly trades’ in equity and fixed income structures. Thomas, as the lead manager of leveraged products, is the source of many of the ideas for this. Additionally, the views of the asset allocation committee at RCM, which include Thomas and Eric Bartholon, are synthesised into a fund and fed into holdings inside the completion portfolio.
The third and most important role is risk management. “Having taken positions, there may be certain beta risks in the portfolio that we don’t think are appropriate. Therefore, there’ll be some risk balancing as the final part of the completion fund,” says Lockyer.
In some respects, the completion fund represents an extension of the discretionary management of the traditional balance manager, says Lockyer. “The completion portfolio is the key element of Global Vision because it enables you to extend the original concept of balanced management. In the traditional balanced management, you just wanted some equity and fixed income, and ultimately what you wanted was the alpha. Now you can push these sorts of assets into absolute return products using the completion portfolio accordingly“.
The completion portfolio enables the fund to make asset allocation changes without interfering with the managers of the investment platforms.
“They have complete freedom to manage the money as they see fit,” says Lockyer “One of the issues that we are concerned about is that managers may start taking similar positions. One of the roles for the completion fund is to make sure that if this does happen the risk involved in that can be unwound without having to tell individual managers to reduce their exposures to this because they are affecting the overall portfolio.”
Global Vision has performed broadly in line with expectations since launch, says Lockyer. “The funds have outperformed their benchmark and added about 1% per annum since inception with a very low tracking error.
“The information ratio for the product at the moment is about 0.6 which is about where we’d expected.”