MAY 2012 Reining the roller-coaster
A multi-asset portfolio can control risks in an unpredictable climate and Aberdeen Asset Management was among the first to spot the importance of managing beta in a portfolio.
MICHAEL TURNER Head of asset
allocation, Aberdeen
Once they have established what the normal returns may be, it uses the “multi-asset framework”.
Multi-asset investing offers an answer to many of the problems of the post credit crisis environment. At a time when cor- relations are increasing and many asset classes are volatile, but at the same time show little real growth, a multi-asset portfolio can move to where there is most value across different asset classes. Aberdeen Asset Management was among the first to explore multi-asset investing and identify the importance of managing beta in a portfolio. The four-strong suite of multi-asset funds is managed by the asset allocation team, headed by Mike Turner. The funds have one of the longest track records in the market and run approximately £6 bil- lion in multi-asset strategies across retail and institutional mandates. They also draw on the expertise from various investment teams throughout Aberdeen. Turner says: “We follow a very disci- plined process and combine three main elements within our multi-asset portfo- lios. First we look at the macro elements – growth, inflation and how they may impact on different asset classes; then we look at valuation – what are the rela- tive attractions of an individual asset class? Finally, we look at sentiment. This examines the propensity of investors to take risk and is increasingly important in the current environment.” Turner points out that the world is constantly changing and no one asset class has consistently come out top over any number of years. In 2011, equities arguably had a bull and a bear market within a 12-month period.
He adds: “This volatility is unlikely to change because it is connected to the deleveraging phenomenon. Market cycles are getting shorter and more volatile.”
For Aberdeen’s multi-asset funds, Turner will look at the peer group to assess the type of risks/return balance it is trying to achieve and his aim is to reach a similar level of return, but with a lower level of risk by investing in a broader range of asset classes. The team focusses on virtually all sufficiently liquid asset classes and will examine the likely prospects for returns.
Turner says: “Multi-asset investment means taking advantage of different market circumstances to achieve returns in a better risk-adjusted fashion than a traditional balanced fund might have done. There are a plethora of dif- ferent asset classes in which a multi- asset fund might invest. We look at the mixed asset sectors and ask if we can achieve the same return characteristics, but in a more diverse – and therefore less volatile – way.”
Aberdeen incorporate alternatives into its portfolios to help this process. Rather than simply private equity or hedge funds, Turner and his team take a more nuanced approach and define absolute return-focused fixed income funds, emerging market debt, or even emerging market corporate debt as “alternatives”. The fund will also take specific commodities positions. Where it does so, the team would aim to invest in the commodity itself rather than natural resources companies. Prices of compa- nies within the sector tend to be influ- enced by the market and are more highly correlated as a whole.
The blending of these assets within a portfolio is extremely important. Turner looks at the correlation between assets and whether, when blended, a better risk-return outcome can be achieved. This will not be a straight line phe- nomenon and the managers will also bring in some shorter-term tactical allo- cation in the funds. He adds: “We are always aware if our return projections for an individual asset class are not going to be met in the short term and we will aim to asset allocate tactically around that. For example, if the euro breaks up, it will be a game-changing event that will mean our return expec- tations are unlikely to be met. We would deal with this tactically.”
In judging sentiment, Turner and his team will look at risk appetite indices, which give them some clues as to whether markets are currently embrac- ing or shunning risk. This will also influ- ence the tactical asset allocation and enable the funds both to profit from and protect against short-term volatility. Turner implements the asset alloca- tion largely through Aberdeen’s range of funds. He says: “In general this is a fet- tered concept and we are buying Aberdeen products and expertise. Our
equity managers follow the firm-wide process devised by Hugh Young and his team. The process is very conservative, prioritising quality and value. It looks at the capital structure of companies – the managers don’t like gearing, preferring exposure to companies that can survive this difficult environment. They also look at quality of management, their business plan and their track record of implementing their strategy success- fully. All corporate management is inter- viewed prior to investing. In general, we are long-term investors.”
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The process is very conservative, prioritising quality and value. It looks at the capital structure of companies – the managers don’t like gearing, preferring exposure to companies that can survive this difficult
environment
Aberdeen’s equity team tends to have a number of natural biases across the portfolios. The team does not tend to par- ticipate in small and embryonic compa- nies. It also very conservative in terms of valuation, taking up to 10% off the earn- ings predictions and checking whether the price to earnings ratio still represents good value. It also has a natural bias to Asian and emerging markets, believing there is still more growth left in these markets and that their expansion will be another five to 10-year phenomenon. Aberdeen’s fixed income process is equally structured. At its heart is a focus on proprietary research, identifying opportunities that have an attractive bal- ance of risks and rewards, and combining uncorrelated investment opportunities. Where the group does not have in- house expertise, it will look to exchange- traded funds and similar to implement its ideas. Turner says: “Although 95% is managed internally, we don’t do active commodity management, for example. This is not about multi-manager, but occasionally we will look outside to gen- erate certain exposures. We have expe- rienced research teams looking at the ETFs in which we invest – they are not an homogenous asset class and we need to ensure that we understand the risks we are taking. Infrastructure is another asset class that we don’t do in-house, but there are quoted equity vehicles engaged in this area.”
Ultimately, the Aberdeen multi-asset team is focused on the beta of markets. Turner believes this has often been a neglected part of investors’ portfolios: “Ultimately, if an investor can only gen- erate a bit of alpha, a bit of dividend return, but is then vulnerable to overall weakening markets, then their overall return will be poor.
“Multi-asset offers a means to man- age that beta effectively for a stronger, more consistent long-term return.”
FUND PROFILE
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