| Hyper charged equilibrium: new balanced mandates |
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| 25/09/2005 | |
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Could the liability driven approach be the balanced mandate's saviour? Even if numerous schemes have already abandoned those mandates, balanced management could be slowly staging a comeback under a new guise, helped by the popularity of the liability driven investment (LDI) approach. The market for new balanced mandates could be substantial given the potential interest from smaller pension schemes, some of which might be too small for a switch to specialist mandates, but still be interested in sophisticated strategies. According to a report to be published by the WM Company, a performance measurer, the switch from balanced to specialist mandates would be profitable only for schemes with more than £150 million in assets Some schemes have already been reported to be considering "new balanced" mandates, among which the £700 million Bedfordshire County Council Pension Fund, which first considered it in 2004, but has yet to make a final investment decision. The larger London Pension Fund Authority has launched a tender for a mandate in new balanced strategies as part of its diversification strategy. Other "new balanced" briefs and tenders might simply go unreported if they are labelled as liability driven. This is because of the striking similarity between the liability driven approach and this new breed of mandates: "new balanced" managers slavishly follow the LDI credo by focusing on liabilities instead than on an index or a peer-based benchmark. As for the traditional managers, they remain responsible for the asset allocation of the portfolio, but implement it across the whole gamut of assets and in a much more flexible manner. Market risk "New balanced management is mainly defined by the ability to manage market risk on a short-term view. We have looked through a 25-year block of data and we have found that the difference between the range of possible returns in three year periods compared to twenty five year periods average 3-year returns and the 25-year return was huge", points out Sarah Smart, Investment Director of strategic solutions at Standard Life Investments in Edinburgh. By taking a series of shorter term asset allocation decisions over the whole life of the mandate, the manager tries to extract more alpha return from taking position in the market without breaching the new short-term risk measures. "This approach gives the ability to accurately judge what areas of market risk will deliver return." Undaunted by short-term risk, which under the traditional approach could mean being sacked by an investor disappointed by a poor benchmark-relative performance, the new balanced asset manager rather seeks to boost its result by implementing a medium-term active allocation policy. A traditional balanced mandate would set the asset allocation to deliver value over a longer period, and in the short-term would concentrate on adding value through active stock-picking activities in the equity portfolio and small tactical asset allocation movements. However, says Sarah Smart, new balanced management, and dynamic allocation within it should not be mistaken for a simple traditional balanced mandates with a large liquidity pocket allowance for very short-term moves in the form of a tactical asset allocation mandate. "For us, a tactical move is on a three- to six-month horizon and is sentiment-based driven, while our positions in new balanced mandates are made on a longer, three to five year, timescale and are for the most part valuation-based driven", she says. Multi-assets In line with the LDI approach, new balanced mandates are not limited anymore to equities and bonds. New balanced managers have taken stock of the investors' need for both diversification and cash-flow matching strategies, and now increase traditional as well as alternative assets in their portfolio. Even derivatives, for cash-flow matching purposes, can now be used within the boundaries fixed by the investor. "The traditional balanced mandate did not give enough consideration to alternative assets. In the UK, they have traditionally been heavily skewed toward equities. In the context of LDI, you have to take into account liabilities and incorporate other assets that can include indirect property such as REIT, hedge funds, and higher yielding bonds", explains Paul Niven, Head of Strategy at F&C in London, who says that a tactical asset allocation plan can also be implemented within a new balanced mandate so as to extract even more alpha from the portfolio. However, some industry players are questioning the viability of this new balanced approach. Could an asset manager be good at managing a variety of assets ranging from bonds to equities that now even includes alternative assets, while investors have been sacking their balanced managers for this very reason, asked one investment consultant? He said that this problem could be eventually circumvented by resorting to multi-management, a suggestion that has already been made by some fund managers. However, for F&C's Paul Niven, who agrees that multi-management has to be given consideration, a single manager strategy could also be an advantage given the faster pace at which the asset allocation can then be made and implemented. But the industry has yet to structure its balanced management offer around this "new balanced" label, as demonstrated by the fact that only a handful of fund managers have been pushing for this kind of mandate, and even less investors seem to have taken a look into it. "We haven't heard yet from any investors specifically looking to invest in this kind of mandate", said the investment consultant reached by bfinance. J.L. |
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Articles of the same Topic : Investment mandates
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