Crisis or challenge? Chaos or opportunity? Call it what you want.
But according to Eric Tazé-Bernard, Amundi’s chief allocation advisor, the current investment environment, which has left many in the industry wondering where to go next, is with us for some time and an approach. Total Portfolio Portfolio (or TPA) is an efficient way to navigate your way.
An event like the Lehman bankruptcy in 2008, that’s what Tazé-Bernard said he would describe it as a crisis, an instantaneous disruption. What we’re going through now, he said, is different, a latent crisis, if you will, something that’s going to last a few years and that’s going to have a lot of consequences.
Today’s investment landscape is uncharted territory. Low yields, low interest rates, increased specter of inflation, production bottlenecks in certain sectors like semiconductors, low expected returns on assets (although the performance has been spectacular in a number of markets this should not continue.)
The strengthening of regulations in terms of the introduction of ESG criteria and the actions carried out by the major central banks, in particular the Fed and the ECB, in terms of the conduct of unorthodox monetary policies in response to the Covid have contributed to calling into question the traditional balances and portfolio constructions. So much so that many industry experts are calling the “60/40 days of the dead wallet”.
Technology and geopolitics
There is also the question of technology which, according to Tazé-Bernard, is invading the whole world and which cannot leave the asset management sector intact.
“This clearly calls into question the way we manage the portfolios,” he said. “How will technology influence the choice between active and passive management? To what extent should quantitative methods be introduced? There is the issue of intraday trading… some investors are able to trade very quickly in certain markets, which affects the structure of the market.
But all of this is also taking place against growing fragmentation of the world, growing protectionism amid tensions between the United States and China, all adding geopolitical risk to an already risky investment scenario.
This uncertainty is triggering a shift, both globally and in Australia, from traditional assets to alternative assets, for example, towards private equity infrastructure and real estate. But this is not without its share of risks according to Tazé-Bernard. He sees these big, long-term trends as swelling bubbles in some areas.
A holistic approach
So, in these unexplored times, how do you best manage a portfolio? Tazé-Bernard sees a Total Portfolio Approach (TPA), a holistic goal-based portfolio construction system that focuses on factors rather than breaking down the investment universe by asset class, region or sector.
“I strongly believe in the fact that when you are building an asset allocation you have to have in mind the factors that determine the asset allocation,” he said. “So it’s not so much how much should I allocate to Australian stocks, foreign stocks, etc. will react to a number of macroeconomic factors which you believe are essential to the structuring of the portfolio. “
He says it’s also an exercise in breaking down silos and avoiding fragmentation within an organization given that thinking about total portfolio return is key. Thus, in fact, the spirit of TPA is to bring solidarity in decision-making within an organization and to ensure that all the teams in the portfolio are working towards the same objectives to achieve the same objectives. ‘investment.
Importantly in the current investment climate, mainstreaming ESG is another element of APT. “I think it’s a broader approach to asset allocation that takes into account things that are traditionally not integrated into the financial world,” he said.
Stewart Brentnall, CIO NSW Treasury Corporation (TCorp), said his organization started implementing a TPA system about five years ago, when TCorp, in the sense of governance, moved on, at the time , from the responsibility of $ 12 billion in funds to around $ 65 billion, when the three investment processes of TCorp, State Super and Workcover were centralized into one, under the responsibility of TCorp.
“I searched around the world for best practices, large scale investment management, state assets, and found some very interesting topics around the world, especially in Canada, New Zealand , in Singapore and in small parts of Europe where, let’s call it, a more overall portfolio oriented investment management approach has been practiced, ”he said.
The fundamental principle for Brentnall was that each of TCorp’s clients had only one goal and the dichotomy was that when you looked at traditional asset management processes, capital was broken down into ‘silos’ and measured against many different benchmarks where each of those subsidiary benchmarks may not have much to do with the client’s mission oriented benchmark.
“Why can’t we have a process where every aspect is limited to the client’s goal (eg inflation plus four or three and a half or 3%, over 10 year periods) and go from the front? And so, the lights came on at this point! ” he said.
When asked what needs to be done to implement such a TPA process, he described four crucial steps:
1. A better governance framework. A change of the board of directors reserving all investment decisions to delegate them to an authorized investment team.
2. An investment model where investment decision making was joined so that the whole strategy, definition and execution of the portfolio revolved around thinking about the best possible way to deliver the highest risk-adjusted return and the best quality portfolio for each client’s needs. The thinking, analysis, decision making and implementation that ultimately takes place in sectors should always consider the full range of needs and complexion of the portfolio and not just those of the sector.
3. Data. Brentnall said, “In order to run this model, we realized very quickly that it was not actually an asset allocation. It is a question of risk allocation. So you need a mechanism that retrieves the right data from the security level upwards and incorporates the right risk analyzes. This then fuels the client’s goal and risk appetite and helps build the best possible portfolio. A custodian-based portfolio valuation service cannot provide this and a purpose-tailored portfolio analysis and risk model is required.
4. Get the right people, the right organizational structure and the right culture. “You have to get the right cultural set that fits the model you’re trying to run,” he said. “It requires a team ready to share ownership of the outcome, supporting decisions that are best for the corpus even when they might not be right for the individual. You have to get the right people on the bus early.
For Brentnall, there is a clear distinction between a TPA model and a strategic asset allocation model; and it’s as much a state of mind as anything – this is where an organization chooses to place itself on the spectrum of decentralization.
He said the easiest way to think about it is that over time a total portfolio model will be based on real-time competition for capital, taking risk and capital out of the pockets over time. asset sectors and giving it to them.
“As you look at a strategic asset allocation model and the capital is pretty static across sectors,” he said. “So a sector manager will know how much capital to operate over time, whereas in a TPA model it is a constant competition for capital in all sectors in order to deliver the best possible return for an agreed level of portfolio risk. “
“Our belief is that a long-term TPA model can probably offer between 50 and 100 basis points of additional return for a given level of risk,” he added.
Take the approach
For Jason Huang, senior portfolio manager, fixed income and alternatives at ANZ Private Bank, the biggest advantage of TPA is the collaboration between different segments or markets and different asset classes.
“I think the importance is how to break this barrier between asset classes. This is a very important element, ”he said.
He maintained that ANZ Private has not fully embraced the approach, there are elements of TPA in his team. have adopted after seeing the benefits of some of the dynamism brought by the system.
He pointed out that TPA’s flexibility would have been well demonstrated in March of last year when in the middle of the onset of Covid it didn’t take long for the market to collapse, then it rebounded almost as quickly. .
He argued that it would have been harder and much longer to manage the decline and profit from the rise using a traditional model. With a TPA approach, you are much more adaptable in terms of the market environment.
But he agrees with Brentnall and stresses the importance of having the right culture in your organization to make sure the approach is successful.
“I think it’s a team culture and a people-driven issue. If you are considering switching to a TPA approach, you really need to think carefully about your existing talents and how the different skills can be applied to this model. It can be a difficult task.
“To adopt TPA, you have to have very, very technical people who have extensive experience in many asset classes, but who are also SMEs in specific areas.
This story was produced in partnership with Amundi Asset Management