This strategy relies on traditional market movements to generate the majority of return. Ganatra says: “These strategies aim to give the investor a diversified portfolio of equities, fixed income and possibly alternatives.” The asset allocation will be relatively static.
The management of core multi-asset funds has changed in recent years. Traditional diversified growth funds once used active management and investments in hedge funds.
Ganatra says: “The heavy use of active management meant the fees for this type of fund were quite high.” In addition, these types of fund tended to be highly correlated to equity markets.
Rather than using higher cost funds with a higher correlation to equity markets, schemes should consider using a fund which uses a passive building block to lower the cost but still offer a diversified strategy.
Core strategy
When considering an allocation to a core multi-asset strategy, schemes need to consider what they want to achieve. Chris Stevens, director of diversifying strategies at bfinance, says: “After all, pension schemes are, by their very nature, multi-asset funds.” The role of a core multi-asset strategy is to provide an institutional investor with either all or the majority of their growth portfolio, says Ganatra.
As pension schemes are themselves multi-asset funds, this core strategy should only be used by pension schemes which do not have the governance to be able to maintain their own portfolio. This would only be small DB or DC schemes.
Philip Saunders, co-head of multi-asset at Investec Asset Management, agrees: “Schemes which do not have the in-house skills to asset allocate should consider this type of low governance strategy.”
Governance is an important issue when it comes to multi-asset allocation because schemes need to be nimble. Stevens says: “If any significant changes have to go to an investment committee, which only meets once a quarter, an investment opportunity could easily be missed.”
This can be thought of as effectively outsourcing the chief investment officer role to external fund managers. Stevens says: “Often the best solution is to combine different fund managers in order to have diversification of investment styles.”
Larger schemes with a more significant governance capability should create their own growth portfolio rather than using the core multi-asset strategy. Ganatra says: “This gives the scheme the flexibility to design a strategy which suits its particular requirements rather than opt for a one size-fits-all approach.”
In contrast, idiosyncratic funds have a different purpose. Ganatra says: “The aim of these is to introduce different return drivers which currently do not exist.” In other words, this fund does rely on market movements of traditional asset classes to provide returns.
Stevens adds: “The role of these types of funds is to introduce diversifying sources of returns which are not highly correlated to equities.”
Idiosyncratic funds can be further divided into two broad management styles. The first style relies on a tactical asset allocation. Ganatra says: “It is the dynamic style which provides the returns.”
The other style is similar to a global macro hedge fund strategy. Ganatra says: “These funds generate returns through relative value or well-timed derivative trades.” These funds are a way to access a hedge fund-style strategy in a more institutional friendly manner. Unlike core, it makes more sense to pay a higher fee for an idiosyncratic manager.
Ganatra says: “These managers are bringing something different to a pension scheme’s portfolio, which could be a more dynamic form of management.”
As the aim of having this type of manager in the pension fund’s portfolio is to introduce new forms of return drivers, the scheme needs to decide what it wants to access. Ganatra says: “Is it about including asset allocation skills, macro-type relative value or long-short equity?”
