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Watson Wyatt calls for “dynamic” asset strategy

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NETHERLANDS – The head of Watson Wyatt’s Dutch investment consulting practice, Gerard Roelofs, has called for a “dynamic” approach to strategic asset allocation.

Roelofs, speaking at the FTSE Global Investing conference in Amsterdam today, also promoted the idea of absolute return mandates and called for a rethink on investment manager fees.

Roelofs, who joined Watson Wyatt Brans in July from Deutsche Asset Management, put forward the idea of “dynamic strategic asset allocation” – somewhere between short-term tactical asset allocation and traditional long-range strategic asset allocation.

“Funds must look at how risks are changing over time. We suggest funds review strategic asset allocation more often.” He said funds should still think long-term but reflect shorter-term considerations. They should “adopt a more frequent style to review strategic asset allocation”.

Roelofs also discussed absolute return mandates, saying they are superior to following benchmarks. Benchmarking, he said, encourage managers to hold investments they don’t like and vice versa. They discouraged contrarian investment styles and create unnecessary turnover.

“Pension fund managers should not have benchmarks,” he told the conference in Amsterdam. Instead, he said, managers should be judged according to pension funds’ goals.

Absolute mandates, over the long-term such as five years, would add diversity in allowing investment creativity and freedom and “allow clients to work towards more meaningful goals”. Such a strategy, he admits, requires a “leap of faith” in your manager.

“Absolute return mandates will become an integral part of the industry going forward,” he predicted. “They are here to stay.”

Echoing a recent Watson Wyatt paper, Roelofs also called for managers to be paid with a base fee supplemented with a variable fee based on performance. This idea - a shift from the traditional ad valorem fee structure - had support from delegates, according to a show of hands. He conceded there was a possible downside to a new fee system. “The risk is that the manager takes too many risks.”

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