| GTAA strategies show merits of decorrelation |
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| 10/02/2008 | |
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January was supposed to be a difficult month for most investors. Equity indexes were down 8-10%. Not so if you were invested in Abn Amro's Global Tactical Asset Allocation fund, which was up 6% for the same period. The Abn Amro GTAA team manages portfolios where active allocations are made over asset classes, regions and styles, using futures, ETFs and mutual funds. "While 2007 has not been a fantastic year for GTAA asset managers, the track record of our funds tends to be uncorrelated to equities," says Daan Potjer, Head of GTAA portfolio management at Abn Amro. He has headed the team since 1999 during which the GTAA funds have grown to €12.5bn, covering 75 clients, most of them pension funds. In a new book co-authored by Chris Gould, Head of Risk at Abn Amro, the two explore the opportunity of return differentials across asset classes and financial markets. One reason for the January out-performance is related to the relative value trades GTAA managers employed. Key strategies may consist of going long 10-year Treasuries versus short S&P500, which benefits when bonds outperform equities, or going long FTSE versus Topix, which generates positive returns when the UK equity market outperforms Japan. Going global "Being global GTAA increasingly generates returns from other areas," note Potjer and Gould. "Active currency management (using strategies such as euro versus yen) has become a standard feature of GTAA products, as have equity style strategies (large versus small cap, value versus growth) and strategies covering a whole range of asset classes outside equities, bonds and cash (such as high yield bonds and emerging market bonds.)" The latest development in the enlargement of the investment universe for GTAA, they write, are active strategies venturing into such areas as individual commodities, including copper, oil, silver and corn. Other relatively new strategies take long and short positions on volatility with the use of futures on the VIX and the VDAX, which are indexes on implied volatility of the S&P500 and DAX indexes. Potjer and Gould run two types of tactical asset allocation funds. The first is overlay, which makes use of relative value strategies using futures and forward contracts, while the second uses long-only absolute return strategies. Interestingly, the Dutch are active users of overlay strategies that make use of futures and forwards as are US and French investors, says Potjer. "In the UK, trustees tend to like derivatives less, preferring absolute-return long only strategies." This is likely to change as UCITs III regulations make the use of derivative instruments for active allocation more acceptable by providing a standard risk framework, says Gould. Still, not all investors were ready to make the leap into GTAA strategies in 2007. According to a MandateWire survey, investor searches for GTAA mandates dropped from 14 in 2007 to 9 in 2008. Yet some of the biggest pension funds, such as France's FRR and Holland's ABP, make use of GTAA overlay strategies. VB |
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