Coming unbalanced
GTAA funds promise better than equity returns with bond-like volatility – but last year a switch from low volatility conditions put some managers in the soup.
According to Mercer, which has surveyed GTAA managers’ results in 2007, there was a much greater dispersal of returns last year, as some managers found that their risk models didn’t stand up in the new conditions.
Although the median return for Mercer’s GTAA universe was 3 pct in 2007, and for the upper quartile 10 pct, the lower quartile returned -8 pct. Diane Miller, a principal at Mercer, says that GTAA managers generally got through February and March okay, but in the summer things began to unravel: “Quite a few managers had positions calibrated for low volatility, so when volatility increased they had to adjust their portfolios. But at the same time, other managers were trying to do the same thing.”
She suggests that those managers who experienced difficulties were perhaps trying to reduce or reverse positions at the same time as a lot of other managers and under-estimated the crowd effect. However, Miller is keen to stress that not everyone suffered. “Some managers had processes that were able to anticipate fairly well what was going on and got out in time,” she says.
Others had stop loss limits which cut their positions as they lost money and some deleveraged when they saw markets behaving in an unpredictable manner. “If they got out quickly enough then they were able to control their losses. And some managers were well positioned against this and profited when others were scrambling to get out,” she says.
After August, managers no longer assumed that volatility would remain low and ran lower levels of leverage, so in November the damage wasn’t as great. “The key to last year was for managers not to lose their earlier gains when the markets went against them,” Miller says. “That differentiated between those who had risk controls that worked when they were tested and those whose risk controls proved inadequate.”
She believes that this may have prompted a rethink. “They’ve realised that they’ve got to try and hang on to the gains, and not lose them when their models get signals wrong. The aim is to have all your positions full on when the market is quiet and then get out before the steamroller comes along.”
Talib Sheikh, co-fund manager of the JPM Cautious Total Return Fund, says that he uses a mix of quantitative and qualitative strategies, with the emphasis on the latter: “A lot of people running these funds concentrate on one asset class but we are really agnostic about where we see returns coming from.” He says there is a lot of uncertainty at present but he is reasonably optimistic over the medium and long term. “One of the things that consoles us is that equity valuations are reasonable. Provided there isn’t a serious global profits recession there is value in equities on that basis. However, we are cautious short term because the extent of the credit crisis write downs are still unknown.”
Guy Monson, founding manager of the Sarasin GlobalSar Balanced Fund, has witnessed 20 years of financial crises over the life of the fund, which finished 2007 up 9.4 pct. But he says the current crisis is one of the more frightening he has seen because of the uncertainty over the actual worth of a large part of the collateral in the banking system.
He is also concerned about climate change, and the implications for excessive resource demand: “There are no quick and easy solutions and we are likely to require huge amounts of capital to solve these problems, and that probably means slower growth in the years ahead. So in the short term I would say that I’ve experienced much worse, but in the medium term the challenges are quite substantial.”
Monson says the risks now are as much about Ben Bernanke rescuing the banking system as they are about him failing to do so and the economy plunging into a 1930s-style correction. “In other words, the possibility that in his evangelical drive to resist deflation, it could be that he sets off a medium-term inflation issue, from which it takes many years to correct.”
As a result, Monson sees the role of the balanced fund manager today as being more about inflation protection than it is about volatility management. “I think we may have seen the worst on the volatility front, but we’re just beginning on the inflationary front,” he argues. “That probably means that some material proportion of the modern multi-asset fund should be allocated to commodities for a longer period than has been normal in most other commodity cycles.”
To read more about GTAA and balanced fund management in volatile markets, please visit:
http://www.thomsonimnews.com/story.asp?sectioncode=7&storycode=37164
