Managers not adding value picking asset classes

If you back active management of your equity portfolio, you probably expect that you can also add value by tweaking the asset classes you're invested in. But new research raises questions.

Monday, October 8th 2018, 6:00AM

Analysis conducted by actuarial firm MJW shows no evidence that fund managers are adding value for their clients with tactical asset allocation, and in some cases, it's costing returns.

"When it comes to setting investment strategy, most investors accept that the largest impact on the risk/return profile will come from the asset allocation," MJW said in its report.

"While variance within asset sectors (i.e. active management) will play a part, this is usually overwhelmed by the differences in returns between, say, equities and bonds. Thus a key consideration is the policy in place to manage asset allocation."

Strategic asset allocation was set to guide the long-term profile of the investment portfolio.

Then, some managers would take a set-and-forget approach, rebalancing back when required, while others would use tactical asset allocation, reweighting away from the strategic allocation to improve returns or reduce volatility.

But an analysis of KiwiSaver providers showed "a mixed picture at best" for those who tried to protect investor capital by switching asset classes, said MJW principal Ben Trollip.

The best tactical allocation was adding 0.5 per cent per year to returns while the worst was losing 0.5 per cent. There was an even split between a positive and negative impact.

It was unclear that there was value to be had, and investors were probably paying higher fees for tactical allocation, he said, because of the macroeconomics and investment committee input required.

Fund managers should measure the impact of tactical asset allocation, he said, and be able to show that it was providing value for money.

It was comforting for investors to be told that a manager was handling market timing and working to protect their money if the market fell, he said, but it was unclear there was any value to be had.

"I would de-emphasise it as particularly important to overall portfolio returns."

Trollip said it was a contentious topic because those who believed in active equities management would also back their ability to pick between asset classes.

But with tactical allocation they had fewer choices and less diversification, and so had to be right more often than with picking shares.

They had to take big positions to have an effect on the portfolio, he said, and if they were systematically doing that, managers risked mislabelling portfolios.

Tags: Active v Passive MJW