Kevin Frisby from LCP, JLT Investment Consulting's Allan Lindsay, Axa IM's Yoram Lustig, HR Trustees' Giles Payne, Aon Hewitt's Ryan Taylor and Bruce White of LGIM discuss how schemes can measure the performance of diversified growth funds, in the first of a four-part panel discussion.
Ryan Taylor: Part of it is taking a step back from what managers have launched that day. If you go back through pensions, at the end of the day DGFs are just the latest version of a multi-asset fund. So there are some that have had no credible historic capability or experience in this area that suddenly come out and say, ‘Yes, we have one of these.’ You do obviously have to take it on board and look at what they are doing, however, it is only going to be the proof in the pudding that evidences that they can actually deliver.
Allan Lindsay: When you are trying to assess a new manager, the difficulty is really twofold. If you know the manager and how they used to react in their ‘old shop’, and say the whole team has just moved to a new place, you have to have the confidence that the new place is actually willing for them to invest in the way that they traditionally have done. Sometimes the ‘new shop’ will have different controls, a different culture and different investment opportunities.
Equally, when a team departs, it is quite difficult to work out whether the people promoted as a result of the departures are actually capable of repeating the previous team’s performance. This is especially true if the organisation introduces changes to the way the fund is run.
Kevin Frisby: You need a lot of support. If a whole team were to move on, then, in terms of our assessment, we would quite often find the past track record is relevant. We would not, therefore, treat them as a brand new startup and say, ‘Come back in three years when you have assets and a track record.’
We would look back at the track record they have created at another shop and say, ‘You are the same team and you are basically doing the same thing.’ However, the other key thing is to look where they are now. Has the new manager provided them with all the support, all the infrastructure and the right kind of trading platforms, and access to the right sort of research?
Bruce White: Can I put a question to the consultants? Obviously you know what managers are doing; you have all their performances. Is there a risk if a manager says: “We have done a good job because we have beaten our objective, which is cash-plus whatever,” in reality, in comparison with other managers who have a similar objective, they may actually have lagged by 4-5 per cent.
Taylor: I do not see any problem with transparency among asset managers. If you ask the right questions I think they are pretty good at providing the information. I think one of the first things is to see the attribution, whatever performance they have produced. Is it all coming from one thing or is it coming from a diverse area? Is it coming from sources you would expect?
Giles Payne: If a consultant puts a DGF in front of me, I need to be sure that it meets the objectives that we are looking for. It may be blending DGFs. It may be reducing volatility of equity.
If I have a brand new fund put in front of me, I would be very keen to understand the translation of that idea into real investment.
Equally, I would look to see some similarities in the way they are approaching it now to how they approached it before. If you suddenly see a markedly different approach, you would want to understand exactly why.
Lindsay: It is not the performance, but the reaction of the fund manager to events that is important. We would not expect an absolute-return type of manager to be following a rising equity market. However, if the equity market suddenly had a downturn, we would equally expect that kind of manager to completely ignore it and just keep pushing along.
If we want a fund that is highly correlated to equities, we would then expect it to take part in a rising market. However, we want to have our cake and eat it. So, we would therefore expect the fund not to fully participate in an equity downturn, and for their participation in an equity downturn to be less than their participation in the upturn.
Frisby: You only want them to be placing bets where they believe they are going to be earning money. I have had situations recently where managers have come in who have not been convincing that they know where they want to take risk and expect to achieve return.
Lindsay: You would expect some managers to say, ‘We do not see any good opportunities and therefore we have actually increased our cash position.’ However, for some managers, that is not their style. They are supposed to be almost fully invested. And it depends on what they have previously said to you. If they have said they normally fully invest and they expect to have a low cash position, then turn up at a meeting and say they have 25 per cent in cash, that is a manager having difficulties.
Payne: At least they are owning up to it, would be my point. The last thing I want to see is a manager coming in with that 25 per cent of cash invested going, ‘I do not know whether it is going to go up or down, but I thought I had better do something with it.’
However, an alternative solution is going out and finding some yield rather than looking at it from a growth point of view. I would expect a proper DGF manager to consider any way of generating returns.
Yoram Lustig: There is a big difference between the two DGF camps. There is the camp of the absolute return that is really based on pure skill – it is all about small relative bets and trades. Then there is the dynamic DGF camp that has beta exposure. The beta exposure is not only based on pure skill. You get the beta as well as the skill-based alpha. If you have a long investment horizon you can capitalise on it, you can harvest the beta returns.
