The ability to change asset allocations significantly, both in applying and removing risk in portfolios, was essential to thrive in the current economic environment, an investment executive has said.
“We’ve been doing asset allocation in Australia now for 20 years and what we’ve seen is an evolution of the way you do asset allocation,” UBS executive director head of investment strategy Tracey McNaughton told a media roundtable last week.
“Previously, it was OK to be a long-only manager: you would set your asset allocation and you would move it but not too frequently.
“In the current environment and the environment going forward for several years, we believe you need to be far more nimble because markets are so fully priced, there is so much liquidity being pumped into them by the authorities that you are going to see these air pockets occur more frequently.
“So you need to be nimble and you need to be dynamic.”
To achieve this, investors needed to be liquid and therefore to consider the liquidity of the investments they were in, McNaughton said.
“My concern with some investors is that they are flooding into a place like the high yield market where the liquidity is not that great,” she said.
“And so when everyone rushes for the exit, like [earlier this month], you’ll find that the exit door is quite narrow.”
The UBS Dynamic Alpha Strategy (DAS) Fund was launched in 2007 mainly as an offering for institutional investors, McNaughton said.
“But increasingly, we are starting to see more wholesale investors because they appreciate that it’s an absolute return fund, so they like that it’s benchmarked to cash,” she said.
“The other thing they like is that we have an explicit KPI [key performance indicator] for the portfolio managers of minimising the number of negative months, so investors appreciate that in terms of the capital mitigation aspect of the fund, and that’s exactly what we’re doing right now.”
McNaughton revealed that earlier this year UBS had de-risked its multi-asset portfolios, particularly the DAS Fund.
“We have made one of the most significant changes in asset allocation for several years,” she said.
“At the beginning of April, a typical allocation was around 40 per cent equities, around 80 per cent in bonds and because the fund can be leveraged we had -20 per cent in cash.
“Today, we now have 10 per cent in equities, we’re down to 50 per cent in bonds and we’re right up to 40 per cent in cash, so that move is one of the biggest changes in asset allocation that I’ve ever seen in DAS.”
McNaughton listed the reasons for the changes as Greece’s debts and the United States Federal Reserve expected to begin its interest rate lift off in September, although the market was not expecting this until December.
She also cited negative seasonal factors.
“This is typically a very illiquid period for the markets, so naturally you get more volatile movements here,” she said.
“We also know that with bond markets they always underestimate the timing and the speed of a tightening cycle.
“So I suspect for the next three or four months this kind of volatility is going to be with us, so it’s an interesting time for investors right now and more so for asset allocators to prove the worth of how asset allocation has evolved.”
