Multi-assetOct 31 2013

Age-old allocation

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A particular area that had been frequently ignored was that of currency investment and risk. Currencies were not seen so much as an asset class in themselves but rather as a more volatile and dangerous risk to what could otherwise have been a well-diversified global portfolio. One dramatic movement in sterling and all the good work had gone to waste. Here then was where we saw the introduction of currency hedging starting to enter the mainstream as multi-managers’ portfolios could bring this institutional discipline through to the retail market.


For ‘multi-manager’ you could read ‘multiple active managers’. The range of multi-managers could be best illustrated by a series of Venn diagrams of all the similar fund managers they all used in varying proportions. The only exception seemed to be when just their own in-house funds were applied.

To challenge this cosy oligarchy came the institutional managers with their open secret of using passive funds – very common in the US but barely touched in the UK, as, of course, none of them paid any commission.

They were introduced to improve lower-cost trading within the multi-managers when managing inflows and outflows. However, quickly thereafter some went further and established entirely passive portfolios, albeit still with an active asset allocation process applied.

This then put the asset allocation process at the heart of the portfolios, leaving the blend of active and passives, or entirely passive portfolios to compete directly with one another; was it all about cost or all about performance? Of course not – it was all about the asset allocation.

Then as volumes grew it became perfectly logical for some houses to bypass the passive providers altogether and in effect create their own baskets of direct holdings. This would enable providers to lower costs while maintaining the asset allocations for the client portfolios.

From here then followed the logical step of finding more cost-effective ways to implement the asset allocations. Thus rather than necessarily having to buy the ETFs or the underlying equities, now derivatives could be applied to achieve the same exposure at a lower cost; whether through buying dividend strips or futures contracts for particular indices, a more precise asset allocation could then be executed at a lower cost. This improves the value to the client and makes implementation of the asset allocation decisions more precise, while minimising the amount of capital actually being deployed. These ‘smart’ passive approaches continue to develop and help to fine-tune the implementation of the asset allocation models.