SWEDEN - Swedish investment managers have created negative performance at the tactical asset allocation (TAA) level, according to new research by Nicklas Fahlström of Stockholm-based Wassum Investment Consulting.
Fahlström’s conclusion is that capital owners have suffered from additional value destruction and they would have been better off had the managers refrained from activities within active TAA.
Fahlström’s research was into 57 institutional balanced mandates operated by Swedish investment managers between 1999 and 2002.
The analysis focused on active TAA between strategic asset classes - usually Swedish and global equity as well as Swedish and global bonds. Allocations at lower portfolio levels such as between regions and sectors were not part of the research.
The results show that the investment managers’ actions within active TAA significantly have affected returns in a negative direction.
The average negative contribution was –0.62 percentage points per annum. One out of 10 investment managers produced marginal positive contributions, with excess return amounting to +0.08 percentage points per annum. In addition, all contributions were calculated before deduction of transaction costs as well as management fees. Thus the results, after deduction of costs, are somewhat worse.
Fahlström said: “The size of negative contributions is substantial. An under-performance of more than 0.6 percentage points per year put the long-term goals of a capital owner at stake.
“Capital owners have a right to expect positive contributions from active external management. This study concludes that it is not worthwhile to hire investment managers for active TAA decision-making – it actually destroys value.
“The capital owner is better off implementing specialist management complemented by a rebalancing strategy that reallocates capital when market fluctuations materially have shifted asset class weights. Reallocation should occur at predetermined fixed limits for minimum and maximum allowed exposures.”
Fahlström added that looking back on the development of equity markets, since 1994, there have been great opportunities to exploit active TAA (see graph).
The Swedish equity market was characterised by a strong positive trend from 1995 to early 2000. There were small negative returns during summer 1997 and big negative returns during late summer 1998.
Since March 2000, the trend has been strongly negative, but it has also consisted of a number of positive sub-periods.
During the full eight-year period, the return has been 9.4% per annum for Swedish equities and 9% per annum for Swedish bonds.
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