Post on 23-Dec-2015
The importance of Asset AllocationMirko Cardinale
Strategic Asset Allocation Specialist
Milan, 8 November 2007
This document is for professional advisers and market counterparty or intermediate customers only. The content is not approved for use with private/retail investors or pension scheme members.
Agenda
Importance of Asset Allocation
Evolution of Tactical Asset Allocation
Morley’s Tactical Asset Allocation process
Current outlook and positions
Performance and risk
Summary
Q & A
Importance of Asset Allocation
Most significant driver of portfolio returns
Academic studies agree asset mix is crucial
Combines assumptions on expected returns, volatility, and correlations
Asset allocation needs to exploit asset-class diversification
Source:Morley/ Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986 Blake D, Lehmann, B Timmermann, A (1999) Asset Allocation Dynamics and Pension Fund Performance Journal of Business 72 , 429-62
Efficient Frontier
Individual Asset ClassesEx
pe
cte
d R
etu
rn
Risk
Co
rrel
atio
n
Time
Efficient Frontier with Alpha
Page 5
Long-term beta-return forecasts
Long-term asset class returns are far more predictable
Fundamental economics & empirical research create building blocks of “sustainable returns”
Equity return prospects now modest
2.8
2.3
2.5
0
2
4
6
8
10
12
14
16
18
20
1981 1986 1991 1996 2001 Present
0
2
4
6
8
10
12
14
16
18
20
Yield Expected Growth
Expected Inflation Subsequent 10 Year Return
Source: Morley Strategy Team, June 2007
The content of this slide is designed to illustrate the results of a research strategy employed by Morley Fund Management Limited for its internal use only. It is not to be relied on by anyone else for their investment decisions.
Sustainable returns vary significantly over time and assets
Sustainable returns combined with historical volatility
Risk and return of conventional asset groups
Source: Morley Strategy Team, illustrative example as at 18 September 2007
Japan Equities (hedged)
Asia Pacific Equities (hedged)
UK Corporates
Global Aggregate Bonds
UK Property
Convertibles Commodities
Global REITs
EU Equities
US Equities
EM Equities
UK Gilts
UK Index-Linked Gilts
Emerging Market US$ Debt (hedged)UK Cash
Diversified StrategyFund (beta only)
Diversified StrategyFund (incl. alpha)
3.5%
4.5%
5.5%
6.5%
7.5%
8.5%
9.5%
10.5%
2% 7% 12% 17% 22% 27% 32%
Risk
Ret
urn
UK Equities
Emerging Market Local Debt
Sustainable returns demonstrate sensible order; but vary over time
Extending the asset allocation framework
Theory and practice show the benefits of a Strategic Asset Allocation framework
But is there any value in shorter-term market opportunities?
Incorporating short-term opportunities is known as Tactical Asset Allocation
TAA exploits short-term asset allocation opportunities
Origin of Tactical Asset Allocation (TAA)
First used to inform “asset-timing” decisions in the 1970s
A “top down” investment process
Captures shorter-term opportunities
TAA added “flexibility” to the strategic benchmark
Bonds30%
Cash10%
Equities60%
Bonds30%
Cash10%
Equities60%
Evolution of Global Tactical Asset Allocation (GTAA)
TAA becomes a broader, standalone investment
Empirical studies highlight asset
class inefficiencies
Single country TAA
Cheap index futures available
Futures markets broader and more
liquid
Multi-country models find regional inefficiencies
Multi-country GTAA
Currency market predictability
found
Multi country / currency GTAA
Pooled funds developed under
UCITS III
1980s 1990s 2000s
A modern GTAA process
Diversified range of long/short positions
Exploits market inefficiencies
Cheap and efficient execution
Low correlation with traditional asset classes
Bond Market Selection
Equity Market Selection
Asset Class Selection
Currency Selection
Global TAA has become more diversified and consistent
Source: Morley as at 30th September 2007.
Characteristics of GTAA returns
Can be considered as a way to reduce overall fund volatility or boost returns
Interest in GTAA driven by surge in demand for uncorrelated returns
Uncorrelated, absolute returns
FTSE All Share-0.40
MSCI World -0.45
FTSE World Eur ex UK -0.34
Lehman Global Agg +0.06
FTA All Stocks +0.05
3 Month Libor +0.05
-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2
Correlation of GTAA Returns
Data uses >8 years of performance data from MPPL Balanced Managed Overlay (Q4 98-Q2 07)
Risk
Ret
urn
Efficient Frontier with TAA
Efficient Frontier without TAA
Initial portfolio with optimised strategic allocation
Improved return expectations for the same level of risk
Improved risk profile for an identical level of return
Philosophy
Inefficiencies between markets more significant than those within markets
Inefficiencies are persistent & exploitable, from
Investor sentiment
Structural anomalies between markets
Non profit-maximising participants
Transactions in futures and forward markets are quick and cheap enough to exploit these opportunities
Morley’s process can exploit these opportunities with the high degree of consistency that our clients desire
Investment process
A robust process that aims to deliver consistent, excess returns
Economic scenario analysis
Forecasting returns
Optimal portfolio analysis
Portfolio selection
Implementation
Why asset allocation?
Asset allocation is the most significant driver of portfolio returns
GTAA takes advantage of short-term asset allocation opportunities
Generates returns from diversified long/short positions across global equity, bond, and currency markets
Represents an excellent source of uncorrelated absolute-returns
Important information
This document is intended for institutional or professional investors and experienced advisers only.
Except where stated as otherwise, the source of all information is Morley as at 31 October 2007.
Where past performance has been illustrated it is not intended to be a guide to the future.
The value of an investment and any income from it may go down as well as up, and the investor may not get back the original amount invested.
Any future returns and opinions expressed are based on our internal forecasts and should not be relied upon as indicating any guarantee of return from an investment with Morley. No part of this document is intended to constitute advice of any nature nor should any part be construed as a recommendation to purchase or sell stocks.
Morley is a business name of Morley Fund Management Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.
Morley Fund Management is also a business name of Morley Fund Services Limited and Morley Fund Management International Limited. All are Aviva companies.
Contact us at Morley Fund Management Limited, No. 1 Poultry, London EC2R 8EJ.
MFM 07/941