Active external managers still require internal guidance

Meredith Booth

By

20/04/2018

Super funds and insurers need to be cautious about implementing internally run tactical asset allocation strategies, an executive manager at one of Australia’s largest insurers states.

The greatest benefit internal investment teams bring to active management is an understanding of the strategic objectives of their funds and how to manage risks around those, Suncorp executive manager, investment strategy and portfolio management, Gwion Moore says.

He notes that more funds are using dynamic exposures, such as derivatives, alternatives and tilts on their portfolios to protect the downside and extract alpha. But such strategies, often sought from external managers, should complement the fund’s or insurer’s objectives and be overseen by internal investment teams, he says.

“There’s a lot of focus on active management with in-house investment teams, which tend to be relatively small and may not have the internal capacity to run an effective tactical asset allocation strategy,” Moore says. “But the internal team does understand the objectives of the firm and the underlying risk appetite, and the greatest benefit comes from focusing active management on these objectives.”

He says if the fund is seeking only additional alpha – the excess return from the benchmark index – then using external active managers is probably more appropriate.

But an external manager may not understand the nuances of the business it is working with, such as the scarcity or abundance of capital, or risk appetite at any given time, Moore says.

“The internal team needs to understand what it’s trying to do using these tools,” he explains. “You need to ask what the trade-offs are between risk and reward and how it relates to the business objectives of the firm. You have to keep one eye on where the business is going.”

Suncorp’s internal team, which manages $18 billion in assets, began using options in 2009 and now uses dynamic asset allocation based on three major drivers – inflation, credit spread and equity markets.

Its strategy is driven by the requirements of balance sheet efficiency, growth and liquidity management, with a focus on diversity, which covers offshore and domestic investors, short-term, long-term, wholesale, and capital.

Meanwhile, Suncorp has engaged in a project that will allow the group to manage its large corporate bond exposures in a timely and effective manner.

Forecast

With regards to the economic outlook, Moore says there is a basic logic to the global economy, which was running towards the end of a long expansion.

“No one will know when it will end but we’re certainly in a period of heightened risk, with an outlook of one to two years,” Moore says.

While the impact of decisions made by US President Donald Trump are random and his views “outside the boundaries of normal market behaviour”, the natural evolution of the economy means investors should be more risk averse.

“The thing with a hedge is that it should at least partially protect you from adverse outcomes,” Moore says. “This means the best outcome is still to lose money on the hedge, as your underlying exposure will more than compensate. It’s a challenge to communicate this because it can be counterintuitive.”

Moore will speak on “Dynamic Exposures: overlays, tilts, derivatives and alternatives” at the 2018 Fiduciary Investors Symposium, in the Blue Mountains on May 21-23.

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