Opportunity knocks

Panel members at the roundtable on tactical asset allocation were:

- London Business School, BGI professor of investment management, Elroy Dimson
- Global Management, founder and CEO Tactical, Peter Higgs
- Cass Business School, director of the MSc finance programme, Meziane Lasfer
- ABN AMRO Asset Management, head of GTAA portfolio management, Daan Potjer
- ABN AMRO Asset Management, asset allocation specialist multi-asset solutions, Derick le Roux
- P-Solve, senior consultant, Dean Wetton

Market reports in the media often have a single theme. These days, the focus is on the prospect of a slowing US economy.

From one day to the next, reports centre on the impact on the dollar, on banks, or stocks. Investment products can have a narrow focus too. That is a pity since there are many market inefficiencies investors can benefit from and there is a large scope of instruments that can be employed.

Global tactical asset allocation (GTAA) uses short-term strategies to add absolute returns. These can come, for instance, from the fund manager’s skill to actively exploit return differentials between and across asset classes, markets, investment styles, currencies and commodities. This can be done through tactically pairing short and long positions with an investment horizon of up to one year.

Where GTAA seeks to benefit from volatility, changing correlations between investment opportunities and market inefficiencies, strategic assert allocation (SAA) takes a long-term view, weathering volatility with a steady hand. For both, diversification – investing in asset classes with uncorrelated return patterns – is a key element in the philosophy.

ABN Amro Asset Management multi-asset solutions team asset allocation specialist Derick Le Roux, told the roundtable: “The goal of SAA is to achieve superior returns through diversification, to take account of correlations; it is for longer-term oriented clients; it can be a reference point for portfolio implementation as well as GTAA.”

While SAA takes a multi-year, sometimes multi-decade, viewpoint, le Roux stressed this investment approach was flexible. Evolving over time, SAA adjusts, for example, to changes in risk premiums, investor risk tolerance or the regulatory framework. As a point in case, he said, for a defined benefit pension fund, SAA would strive to maintain beneficiaries’ purchasing power, adjusting portfolio returns to reflect changes in inflation.

Like SAA, GTAA also involves active positioning.

ABN Amro Asset Management head of GTAA portfolio management Daan Potjer added: “Risk is rewarded over time and it would be a pity not to exploit the opportunities volatility in a range of return drivers offers. We use multiple investment ideas, thus diversifying exposure.”

Potjer noted that a must for this type of investing is directional thinking on the part of fund managers and the courage and skill to make timely calls on markets.

Its use of the most liquid market instruments as sources of return, mainly futures and exchange-traded funds, allows GTAA to target interesting opportunities in an active and nimble way at a very low cost.

He said: “This creates the room for many different active strategies. In fact, as a GTAA manager, in terms of the possible ideas, you are only limited by your own imagination.”

Ease of implementation and market access and liquidity do affect which investment opportunities are exploited. Thus, Colombian bonds, for example, are harder to get exposure to, while liquid futures allow easier access to the S&P 500 index. It is clear that optimal availability and liquidity influence the selection of strategies to be implemented.

Equally, there is an optimal amount of information on which to make a decision.

Potjer said: “You might think you need 100pc of the information before you can make such a decision, but actually 30-50pc is the optimal level. If you wait for all the information you miss the opportunity.”

Thus, research is essential, but also a knack for the opportunity.

For GTAA, flexibility is key. This involves the need to combine information from quantitative and qualitative models and, crucially, fund manager skill. No doubt, investment ideas have a limited life cycle. Given its flexibility, GTAA has the “luxury” to jump to new ideas.

Potjer added: “While you are not going to be right all the time, if you have a wide enough scope, you will get a decent information ratio.”