Do managers earn their fees for asset class calls?
When choosing a fund that invests across asset classes, should investors look for one that is tactical and aims to maximise their returns by increasing or reducing their exposure to the different asset classes depending on its outlook for equities, bonds, property and cash, or is it better to go with a fund that sticks to a set allocation to the asset classes?
Tactical asset allocation managers were challenged on two platforms at the Investment Forum conferences organised by the Collaborative Exchange and held in Cape Town and Johannesburg this week.
In a panel discussion on asset classes, Brandon Zietsman, CEO of PortfolioMetrix, an investment manager which runs risk-profiled portfolios for leading financial advisers, said multi-asset funds are important because many South African investors have their retirement savings in them.
PortfolioMetrix analysed funds in the Association for Savings and Investment South Africa multi-asset high-equity category and found an average exposure of about 44% to local equity, 19% to global equity, 14% to bonds, 14% to cash, 7% to listed property and 2% in global bonds.
It then tested what three prominent managers would have delivered using their own actively managed, single-asset class funds as building blocks, but keeping their asset allocation constant in line with these weights.
The outcome was a better return from the static asset class weights than the actively managed portfolio.
Zietsman told Money he is not advocating blindly sticking to static asset class weights, but he believes that many managers develop unreasonable convictions in their economic views. Unpredictable events often rubbish their well-reasoned arguments, he said.
Zietsman believes managers and advisers should be engineering well-diversified, robust allocations that will withstand a broad range of unpredictable conditions.
When risks to asset classes build up to such an extent that they can't be ignored, it is prudent to tilt the portfolio away from those classes (tactical tilts), he said.
Investors often fail to appreciate the importance of actively managing funds for risks that may or may not materialise in markets. Some drag on your returns as a result of this may be worth it, said Zietsman.
In the second attack on managers who use tactical asset allocation, passive manager CoreShares told Investment Forum delegates its research suggests actively managed funds may be failing investors when it comes to choosing the right asset classes.
In the low-equity multi-asset sub-category, the return target is typically to
deliver three percentage points more than inflation as measured by the consumer price index - so 7% when inflation is 4%.
CoreShares considered all the three-year periods over the past 15 years and found low-equity multi-asset funds achieved this target only 34% of the time.
The passive manager then determined how often this return target would have been reached had these funds stuck to the strategic asset allocation they use as a starting point instead of tilting asset class exposure.
Chris Rule, head of product at CoreShares, said if low-equity multi-asset funds had stuck to their strategic allocation, they would have achieved consumer price index plus 3% over all three-year periods in the past 15 years 52% of the time.
Rule said similar statistics are also true for the other multi-asset subcategories that have higher allocations to equities.
But actively managed funds claim they do earn additional returns by calling the right times to buy more or less of each asset class.
Rob Spanjaard, manager of the Rezco Value Trend Fund, said his multi-asset fund outperformed its peers in the multi-asset high-equity subcategory over the past almost 15 years and has outperformed its peers by four percentage points.
The fund achieved an 11.99% a year return over the past 10 years.
Spanjaard said two of the percentage points came from Rezco's stock selection and the other two from tactical asset allocation.
He said the fund also achieved good returns by changing its exposure to different sectors in the equity market at the right times.
While timing the market is not something one should try at home, experienced managers like Rezco can demonstrate a benefit from active tactical asset allocation, he said.
Active asset allocation will be key in achieving inflation-beating returns in the years ahead as both local and global markets are likely to deliver a lower range of returns, he said.
Natasha Narsingh, head of absolute return at Sanlam Investments, said the Sanlam Investment Management SIM Inflation Plus Fund largely follows a strategic asset allocation, but also makes tactical calls to achieve its inflation plus 4% return target.
She said the solid positive returns the fund had earned over the past five years, especially in a down market year like 2018, proves that this has worked. The fund has returned 9.68% a year over the past 10 years and 10.05% over the past 15 years to the end of March.
Narsingh said the fund also actively pursues returns in asset classes by, for example, tactically changing its fixed-income investments to capture the best yields, and in foreign equities by investing in some listed alternatives such as music royalties.
SIM actively uses derivatives to protect the fund from market falls and the compounding effect of not being exposed to sharp market losses has also benefited the fund a lot, she says.
Deviations can pay off but they're risky and come at a premium price
Many actively managed multi-asset funds determine a strategic or set allocation to the different asset classes but deviate from this in line with their views on the returns each asset class will deliver. This is known as tactical asset allocation.
Clients pay a premium fee to fund managers who make asset allocation calls as well as pick shares, bonds, property and cash instruments on their behalf - for example, about 1.25% a year versus 1.1% for the management of the sum of the parts.
Many, though not all, passively managed multi-asset funds typically use set or strategic asset allocation and stick to it regardless of what is happening in the markets.
This helps to keep their costs low and enhance the savings from index-tracking investments.