AUSTRIA - Austrian pension funds should not have stuck to strategic asset allocations as widely used risk controls could not have worked last year, accordng to Helmuth Frey, head of quantitative management house IQAM.

Frey said the major problem institutional investors faced last year was they were "sticking to their strategic asset allocations at all costs" when he believes they should otherwise have taken alternative action.

IQAM's calculations led it to believe portfolios should have reduced their equity quotas for 2008 to almost zero, despite having a strategic allocation of 40%.

Frey largely blames the risk controls in place in many portfolios, the so-called CPPI-model (constant proportion portfolio insurance), as he is convinced: "CPPI is no use for future risk control, it can only serve as a fuse which blows in emergencies."

He pointed out that CPPI strategies "inevitably lead to a high cash allocation" in times of crisis - "and you do not need a manager for that".

He continued: "It also basically means that the manager has failed because all the risk budget is used up."

Instead, investors should use risk management strategies which also allow overthrows of strategic asset allocations where necessary, to make the best use of risk budgets.

According to Frey, however, Austrian pensionskassen have too little faith in consultants to ask them for advice on major portfolio changes.

He pointed out that almost 95% of assets held in Austrian insurance plans and pension funds was invested in funds, which is basically the outsourcing of asset management.

"But a fund manager will never tell you to fire him in order to make changes to the asset allocation," argued Frey.

"External managers are currently almost solely used for studies or to prove a certain investment decision."

And on that point Frey also has a bone to pick with widely-used strategies.

"Active-passive studies (i.e. LDI) are no good because pensionskassen do not need to optimise their portfolio for some unspecified future period. But they do have specific dates in the future on which they have to be able to make certain payments," he noted.

The boutique house IQAM, which is also running funds for Austrian pensionskassen, relies completely on statistical data and calculations for the choice of their investments.

"We see more interest in quantitative asset management now after the crisis as some of the ‘voodoo magic' - more gut-feeling-based forms of asset management - has lost its appeal," said Frey, who, as he himself admits, is a missionary when it comes to quantitative asset management.

According to IQAM data, its risk control outperformed CPPI-models by 4.85 percentage points last year and the worst fund in the IQAM universe returned -0.3% last year.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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