GLOBAL - The use of tactical asset allocation as a fund overlay is "unwise" and takes up a disproportionate share of a pension fund's total risk budget, warns Watson Wyatt.
Robert Brown, senior investment consultant, said: “We believe there can be a place for TAA in a line up of active ‘return-seeking’ skill-based strategies depending on a fund’s beliefs and governance. The risk allocated to this strategy should be consistent with other active strategies and not dominate the risk taken by the fund.”
Brown says two changes have occurred in recent years that make TAA more attractive from an institutional perspective – the inclusion of more asset classes by managers in their decision sets and TAA strategies are increasingly available via pooled funds, removing a number of former implementation hurdles.
“As a result, we believe that TAA has a place in the ‘return-seeking’ part of a pension portfolio alongside other ‘alternative’ asset classes and approaches,” he said.
“A key advantage of a TAA programme is that it has a low or no correlation with equities. However, like all skill-based strategies, choice of manager is of prime importance.”
Watson Wyatt believes skilled managers should not have excessive restrictions on their ability to take long and short positions for an optimum result from TAA strategies.
“To ensure that TAA managers are able to use their skill to its full extent, they should not have significant constraints,” Brown said.
“In an ideal world, the structure of the mandate would include as many assets as possible to increase breadth. Control ranges would by symmetric, allowing both long and short positions. As with currency mandates, our preferred approach would be to set an overall risk target and allow managers reasonable levels of flexibility within which to achieve their performance target.”
Standard Life has increased exposure to risk assets in three out of five funds in its Active Plus and Passive Plus workplace pension ranges.
Some 48% of employers are unaware of the services or help they offer to members of their defined contribution (DC) schemes, according to Aon.
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