The world is the oyster of the tactical asset allocation managers and there are signs that their skills are once again finding favour with investors – those in the Anglo Saxon mould anyway. In fact there are active pockets of TAA in places as diverse as Australia and the Netherlands, but in the UK and the US it is something that appears to have withered on the luxuriant vine of the bull market. Now it is attracting interest as a potential extra source of alpha for the leaner times ahead.
This is the message that Australian firm Tactical Global Management, which has set up shop in London, with eyes fixed on the European markets, wants to get across. “We are global macro managers, we forecast the world’s major equity, bond and currency markets,” says Peter Higgs, TGM’s managing director, in London. The firm manages £6bn (e10bn) in overlays, for clients in Australia and elsewhere.
“The products that come from that are TAA and currency overlays, and rebalancing services. And we aim to launch a hedge fund – this will have the same core competency, but packaged in a different vehicle.
“We believe all funds in the world can benefit from TAA,” he says, and rejects the view that it is tied to particular market cycle.” When pension funds had balanced managers, then TAA was included in the package. When funds move to specialist managers, TAA just gives you back that element in the package.” But the techniques involved have developed considerably over time and there are different styles, some with higher potential returns. “TAA is really about taking positions in many markets and maximising the breadth of that process.” The trend has been from fewer larger to more frequent smaller positions, he adds.
Montreal-based TAL Global Asset Management is an asset allocation specialist, but it has a number of products that could be seen as a single continuum. “The first is in a balanced fund we run, where we reallocate within their portfolios, which are actively managed. That is bulk of business,” says Maxime-Jean Gerin, first vice president,global asset allocation and currency management at the firm with $18bn (e20bn) in assets.
“Our second product is for those who go into special management route, which means they lose one of the most important aspects of balanced accounts, asset allocation. Since many of our clients don’t like derivatives, we have an ‘asset shift account’. We take 3% of the client’s assets as an additional specialist manager we put this into the account and move it back and forth from zero to 100% into the different asset classes. So they can achieve a maximum 3% overweight in, say, equities overall.”
Where clients are comfortable with derivatives, TAL offers an asset allocation overlay. “We take just 1 to 3% of the fund value for cash cover for the derivatives. And we run an active overlay on top of the client’s bench mark.” He adds: “This has been our fastest growing segment of the past few years. The interest has been incredible in Canada. We have just won three mandates in the past month.”
Gerin says that clients are looking for an additional source of value added not correlated with that from the stockpicking process.
At Barclays Global Investors in London, asset allocation strategist Lars Hagenbuch runs the recently launched asset allocation investment fund. He explains: “We are concentrating our asset allocation decisions into the fund. So clients wanting allocation across their portfolios would pledge 2 to 3% of the portfolio into the fund, which would deliver all the asset allocation performance, with the rest of the portfolio on a passive basis.”
Launched April last, the fund has £120m invested. While the risk and return characteristics of the fund are high, once these are measured with the 97% or so passive element, the significant risk in the fund is diluted. “In some ways it is like an overlay account, but structured as a unitised fund,” he says. The value added can be measured by unit price movements, available from Bloomberg and Reuters. Since launch it has been a volatile performer, but within one standard deviation of its launch price, he says. The minimum investment is e250,000.
The fund structure gives investors the protection of limited liability, which ring fences the clients’ potential downside to value of assets in fund, from the use of forward and derivatives contracts.
“The consultants have been positive. They realise it does give you a more efficient solution,” says Hagenbuch.
The returns that full overlay programmes can offer of around 75basis points at fund level were overshadowed by the high absolute figures of the 1990s, Higgs of TGM acknowledges. “But in a climate of single digit returns, a return of 50 to 100bps is significant. So interest should increase.” At TAL, Gerin says “we calibrate our work to the objectives of our clients. So we can take on bigger positions and more risk to achieve 1% performance levels.”
It is high time for a change in attitude to TAA, says Higgs. In the UK, it is still living down its history from balanced managers’ poor track record on asset allocation. He hopes the new breed of allocation managers can persuade the investors. “It is all a long process of education,” he believes.