Unfortunately, from a journalist’s point of view at least, there is nothing new or radical about the investment principles that president and head of research at Callan, Greg Allen (pictured), is touting. He says investors should stick with the status quo of long-term, stable strategic asset allocation regardless of the recent market turmoil challenging investors.
“I’m frustrated by the disconnect between what’s trendy and what’s real,” president and head of research at Callan, Greg Allen, candidly admits. “Institutional investors have been refining their approach for 25 years. I’m sceptical I still believe in equities and bonds and real estate, the rest of the stuff our industry does is designed to make that look interesting.”
Allen says it has been a difficult 20 year period, but that people are looking at the short term results and trying to come up with ways to deal with that.
“People are talking about an ‘equity-centric’ portfolio. I’ve never heard that before. Equities are a long-term investment, now it is seen as a bad word,” he says. “There are more strategies based on PowerPoint presentations and theories than on real track record. Everyone has an idea. People are led to believe there are big changes, but the old way is ok.”
By way of demonstration, he says all the “heat and smoke and a little bit of light” that has been given to hedge funds and the average allocation in the US is only about 3 per cent, after all this time.
“The money belongs to the people and the institutional investors’ job is to build a durable, sustainable portfolio. An internal CIO of a fund used to be a long-term position but in the last few years they are more like funds managers with the turnover, and everyone wants to make their mark. But with institutional portfolios 80 per cent is blocking and tackling, it’s the long-term strategic asset allocation, the exposure to markets, and adding a little bit of alpha on the margins.”
There are many of these so-called contemporary strategies that Allen names as fitting into this fad: risk parity, dynamic asset allocation, and even risk management.
“Portfolios went down in 2008 but it wasn’t because investors didn’t have a risk management system. Investors couldn’t have prevented it, most institutions have robust risk management in place.”
He says from custodians to trading desks, which are increasingly regulated and professional organisations, as well as elaborate performance measurement where managers are being analysed daily, and investment policy statements, governance and reporting, investors have a clear focus on risk management.
“To claim they have no risk management in place is absurd,” he says. “And now the systems arising to fill that ‘void’ instil a false sense of security. People are trying to boil it down to one or two things when it’s so complicated.”
“You’re a long-term investor and have exposure to markets, you don’t get in and out.”
Allen says another “tragedy” is the increasing focus on the short-term at the expense of long term, and says LDI is an example of this.
“The construct of a pension fund is specifically/explicitly designed to engender long-term savings. It’s a savings vehicle but that has shifted to managing short-term volatility, funding and actuarial valuations. LDI is dramatic version of that, and dynamic asset allocation is a way to get there.”
Allen says he can’t think of a corporation which isn’t trying to get equity risk out of its portfolio, when 10 years ago was it was the exact opposite.
“It’s a 180 degree difference, they were fully funded and trying to add to equities a decade ago,” he says.
Allen admits the philosophy of essentially challenging the latest demand-driven (or supply-side inspired) strategies “hasn’t been good for our business”.
“It’s at odds with the trends and what clients are asking for. But we are not a dogmatic consulting firm.”
Evidence of this, is the fact one of its clients has been one of the most vocal in its approach to adopting progressive asset allocation strategies, and a number of clients have risk parity allocations.
“We’re here to serve. The consultant is not a setter of investment policy, but if you’re going to do it we ask what the pros and cons are.”
Allen is sceptical about the trend towards allocating assets according to underlying economic fundamentals, adding that traditional asset allocation studies also do extensive scenario analysis.
“I haven’t seen enough evidence it helps that much, I don’t get the great insight, how is it shedding any great light?” he asks. ‘In traditional asset allocation studies we do, we simulate asset and liabilities into the future and do scenario testing of a portfolio in for example high inflation. This approach has the benefit of going out afterwards and hiring a funds manager.”
He does concede the newer approach may allow for more flexibility, as with traditional asset buckets there are often interesting strategies that don’t get allocated.
Allen is positive on one new development in the industry. With the move to defined contribution he believes target-date retirement funds are an “elegant” solution.
“I’m enthusiastic that once the regulatory environment around 401(k)s is more clear, instead of just buying record-keeper target-date funds, people will build their own and use all the tools of defined benefit – like asset classes and private markets, rebalancing, trading efficiencies, oversight, hire and fire managers. That is a positive trend,” he says.
