When we have used funds, we have found it can be difficult to understand actual risk exposures, even when using advanced ‘look-through’ software, as the managers of the underlying funds can move quickly and may employ strategies that muddy exposures, such as currency overlays, shorting or futures.
It is not that we never use funds.
There are areas of specialist expertise, such as UK smaller companies, where we can and do have some exposure, but our exposure will be focused and limited, ensuring we avoid accidentally duplicating or cancelling out exposures.
Of course, we do not look at our portfolio in isolation. We spend a large part of our time trying to understand the broader risk environment.
This often takes the form of trying to identify change in how asset classes are behaving relative to their history and to other asset classes. For example, government bonds are not always less volatile than equities, neither are they always negatively correlated to equity.
In this sense, we look at risk dynamically and manage our risk actively.
In control
It is within this environment that we can understand whether our intended risks are scaled correctly and, importantly, where we might have exposure to unintended risk.
It is, therefore, essential to have as much transparency and control as possible. We believe that asset allocation in this way is the most precise approach to managing risk, providing us with a broad range of risk levers and optimising our chance of meeting our clients’ risk/reward objectives.
Rob Burdett, F&C Multi-Manager co-head
Picking the right fund managers, rather than asset classes or sectors, is what makes the real difference.
Before I delve into the arguments to support my view that fund selection should trump asset allocation, we would do well to first remember the client.
Why has the client chosen a multimanager product in the first place?
I believe it is to invest with a multitude of managers, assembled with enough skill to justify the fee.
Yes, they will expect asset allocation to be considered but the clue is in the name. The outcome, hopefully, is to improve the risk/reward and to outsource.
Surely, then, it goes against the client’s grain for the multi-manager to generate most of their risk and returns from their asset allocation views.
All you are ending up with is an expensive way to express the views of one manager, or one team, however good they are.
Under the spotlight
Our team members will have been working together for 20 years next April, and my first point would be that it intuitively makes sense to focus on fund selection.
During those 20 years I have met thousands of managers in my search for experts in many asset classes.
Not a single manager has claimed to get all their returns from asset allocation, and yet many claim to get all of their returns from stock selection – although most claim to blend both.
This bias to the granular level of the selection of single companies seems logical to me.
