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GLOBAL TACTICAL ASSET ALLOCATION GLOBAL PENSIONS

A Is GTAA
S PENSION FUNDS across the globe thetically and on a long-short basis.
chase alpha, a growing number are “If you bought US, you basically bought the
turning to global tactical asset alloca- dollar and the US equity market in one single
tion (GTAA) in a bid to extract added bet,” he said. “What we’ve seen over the last
value anywhere they can. The mounting five years is that TAA has been re-invented in a
appetite for GTAA is reflected in a spate of long-short world, so you separate out all the
recent mandates handed out by high profile
pension funds across continental Europe and
the UK over the last year. The €64.7bn Dutch
pension fund PGGM has hired three
GTAA managers – Goldman Sachs Asset
still the way countries from all the equity, bond and cur-
rency markets and you manage those on a
long-short basis.”
O’Brien believes this evolution of TAA has
markedly improved the value added proposi-

forward?
Management (GSAM), Bridgewater Associates tion for managers: “On a long-short basis, the
and First Quadrant – since setting up its GTAA information ratio you can get from GTAA - the
overlay programme in 2004. In addition, the return divided by the risk – is around 1,” he
€17bn Swedish AP2 tapped GSAM for a GTAA said. “So you’ve got a low correlated strategy
brief while the £1.3bn Fujitsu Services Pension that has a high information ratio and has low
Fund (UK) hired Barclays Global Investors frictional costs of implementation. That’s a
(BGI) to run a GTAA mandate. very good proposition.”
It would appear that the number of GTAA
mandates awarded by pension funds this year Risk management
is waning in comparison to last year’s furor, but One of the issues for pension funds to consid-
managers insist interest remains stronger than er when implementing GTAA is risk manage-
ever and say the strategy pension funds shied ment. GTAA is one strategy where you can
away from just five years ago has huge growth scale the amount of risk you allocate to the
potential going forward. strategy to get the risk exposure that you want
“The interest in TAA overlay is consistently but as Collins from Watson Wyatt explains, you
picking up across every developed market in need to be aware of the volatility levels of the
the world,” said Michael O’Brien, managing funds you’re investing in.
director, European institutional business, BGI. “Rather than just saying I’ll allocate £50m to
“The number of high profile allocations hasn’t the strategy, you need to be aware of how
been as high [this year] but at the root and much risk you’ll take,” he said.
branch of the pension industry there’s still a “Different managers have different levels of
lot of interest and a lot of activity.” volatility in their funds so you need to scale the
Tony Broccardo, CIO of F&C, added: Global tactical asset allocation (GTAA), which amount you commit to the strategy according-
“There’s a consensus that returns from market ly. In terms of the risk budget, you have to con-
places will be more normal, certainly com- experienced a kind of renaissance last year, is still sider how much risk you have got in all the
pared to the 1990s, and therefore the added
value from a well constructed asset allocation
on the agenda for pension funds. Kristen Paech strategies and how much is concentrated in
each of the individual strategies to make sure
and tactics will be proportionally more impor- reports on the changing face of GTAA you’re not overly reliant on any one particular
tant going forward than it has been for many strategy.”
years.” target return but to minimise volatility within as the mechanism for controlling the various Another factor that must be taken into
GTAA aims to add value by overweighting portfolios.” risks within a multi-asset portfolio – it’s that account is the design of the mandate. Muysken
attractive markets and underweighting those During the equity bull market in the 1990s, realisation that the risk side needs to be man- from Mercer said design can have as much
considered to be overvalued, and can be the need for such a strategy was perceived by aged as well as the return side which has impact on performance as the choice of man-
expected to enhance returns above the strate- pension funds to be benign. Turnill said the brought GTAA centre stage.” ager.
gic asset allocation – the neutral allocation or possibility for funds to earn high returns with “In designing the mandate, I would say resist
pension fund benchmark. To date the substan- a passive asset mix meant there was less desire GTAA overlay the temptation to place too many constraints
tial risk budget and governance required to to look at alternative return-seeking assets. The majority of pension funds that hire GTAA on the manager because it will hurt their per-
implement the strategy has made it nearly “Going through the bear market, it’s become managers choose to implement the strategy as formance over the long term,” he said.
impossible for smaller pension funds to opt for clear that simply benchmarking to an index is an overlay, as opposed to investing in a fund. Alistair Lowe, director of global asset alloca-
a tactical overlay. But John Collins, investment not the right solution for many pension funds Generally, the overlay approach is considered tion at State Street Global Advisors (SSgA) in
consultant at Watson Wyatt, said the emer- when that index is falling very sharply,” he simpler and more cost efficient than trading Boston, agreed investment breadth was a vital
gence of pooled funds was seeing GTAA’s said. physical assets. Marc Nuijten, head of deriva- part of the mandate structure.
appeal stretch beyond that of only the larger Additionally, the equity and bond markets tives and overlay management, PGGM, said: “People are looking to have as many inde-
pension funds. Five investment managers have were highly correlated, resulting in a lack of “Using a derivatives overlay structure, we were pendent sources of alpha as they can, so mix-
launched pooled GTAA funds in the last 12 investment breadth, making it harder to add able to implement unfunded mandates which ing everything from equities, market neutral,
months, he added. value. But consultants say pension funds are is very efficient from a cash perspective. Also, active fixed income, currency management
“We are seeing more interest from smaller beginning to regain confidence in GTAA as a the derivatives market is very liquid, so it’s pos- and GTAA within an overall portfolio context,”
clients who maybe wouldn’t have considered source of alpha with the strongest interest sible to implement strategies over a short peri- he said. “GTAA strategies do well at different
the strategy and that’s partly facilitated by coming from the UK. “Historically, the main od of time.” times from equity market neutral strategies
managers offering pooled funds which makes interest for GTAA has been in Australia, but Turnill of MLIM said pension funds and and that lack of correlation gives them better
it easier for them to implement the strategy,” more recently it’s becoming more popular in trustees had recognised that physically buying diversification of their alpha.”
Collins said. “It means you don’t have to set up the UK,” said Bill Muysken, global head of and selling assets, particularly if those assets As pension funds struggle to meet the con-
the same legal documentation that you would research, Mercer Investment Consulting. “In are handled by different managers, was a very flicting aims of managing risk and enhancing
have had to previously and it also gives clients Australia, when the market moved from bal- difficult and expensive way to implement returns, managers and consultants predict
limited liability within the fund, which you anced to specialist management in the mid GTAA. increasing numbers will turn to GTAA.
wouldn’t have had on a segregated basis.” 1990s, clients making that move wanted to “They are now using TAA overlay – it’s a “There’s a balance between closing down
Another benefit of pooling is that it means retain an element of TAA in their manager more cost efficient, cheaper and quicker to risk from a liability point of view, which tends
clients do not put excessive restrictions on the structure. In the UK, however, balanced man- implement, and it fits in very well with a struc- to mean minimising interest rate risk in a port-
manager, he said: “If you believe you have agers in general haven’t done a good job of ture where you have a series of specialist man- folio, but at the same time, creating part of the
appointed a skilled manager it makes sense to TAA so when the UK market moved from bal- agers managing the underlying assets,” he said. portfolio to add value,” said Broccardo from
allow them to take all the positions they wish anced to specialist, it was normally on the basis O’Brien from BGI said in the past GTAA was F&C. “It’s within that growth part of the port-
to. We believe restricting a skilled manager that asset allocation was passive. People have done on a long-only and funded basis. folio that we think GTAA will get a decent slice
could actually be negative in terms of the types now realised that just because balanced man- Nowadays, overlays are generally executed syn- of the value added proposition.”
of returns you will receive.” agers in the UK tended to give TAA a bad
name, that didn’t necessarily mean that TAA
Adding value was a bad thing.”
According to Richard Turnill, head of asset Tony Broccardo, CIO at F&C Asset ‘People have now realised that just
allocation and economics, Merrill Lynch
Investment Managers (MLIM), there are two
Management, said lower expected returns
from equities had also prompted pension
because balanced managers in the UK
ways to add value through GTAA. funds to consider GTAA as a means to hedge tended to give TAA a bad name, that didn’t
“For a pension fund, you can either use the away their equity risk.
inefficiencies within the market to try to “It’s a natural and correct reaction to the
necessarily mean that TAA was a bad thing’
enhance returns over time, or increasingly, undue focus placed on growth equity strate-
you can use those inefficiencies to achieve a gies in the late 1990s,” he said. “GTAA is seen Bill Muysken, Mercer
40 SEPTEMBER 2005