Hampshire Pension Fund has created a new tactical asset allocation portfolio funded from reserves that were temporarily invested in equities.
Schemes have increasingly been using these structures to make faster investment decisions that take advantage of market movements.
The £4.3bn Hampshire fund holds £702m of assets in its tactical asset allocation portfolio at March 31 2013, according to its 2013 annual report.
“During 2012/13 the pension fund panel reviewed the investment management structure and introduced some changes. Funds temporarily held in UK equities portfolios were used in September 2012 to create a new tactical asset allocation portfolio,” said the annual report.
All managers have been set targets to achieve over three-to-five-year periods, according to the report.
Investment managers are set targets to outperform their benchmark indices. The weighted return of these targets for 2012/13 was 15.1 per cent, according to the report.
Tactical asset allocation involves making investment decisions over the medium term, usually with a one or two year viewpoint, according to Robert McElvanney, investment consultant at Aon Hewitt.
Markets tend to overshoot or undershoot the fair value where they should be, he said.
“By taking a view on whether something is expensive or cheap today you can take advantage over the medium term,” said McElvanney.
Some schemes will pursue tactical asset allocation when they are underweight or overweight in a certain asset class, he said. An alternative to this is to put in place an automatic rebalancing policy.
Investors can make gains using this type of asset allocation by going into something that is underpriced or selling an asset that is overpriced, said McElvanney.
TAA is most commonly performed within fiduciary management, according to Alexander Koriath, director at KPMG.
“Tactical asset allocation is notoriously difficult and it is generally very hard to get short-term asset allocation decisions to outperform a long-term benchmark,” said Koriath
