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Betting against acts of God is a great way to make money, but institutional allocations to natural catastrophe reinsurance have stayed relatively static even as some managers are generating double-digit uncorrelated returns.
Chilling prospect of minus returns for next 10 years
(Pictured: Greg Cooper)
What fund managers and institutional investors are doing now, as they have done for the past 20-or-so years, has a high probability of producing a poor outcome over the next 10 years, according to Greg Cooper, the chief executive of Schroder Investment Management in Australia.
He told a session on investment product evolution at the Fund Operations Summit that the industry was seeing a “regime change” because the traditional asset allocation model, of 60:40 or 70:30 growth versus defensive assets, did not work very well. He produced figures going back 100 years which showed that volatility of such portfolios, even over rolling 10-year periods, was much greater than you would expect. This was a major problem due to sequencing risk when there is a big market shock, such as the GFC, close to investors’ retirement.
Looking ahead, based on current share market valuations (Shiller P/E average of greater than 20 times) and with the 10-year bond yield of less than 3 per cent, such balanced portfolios would deliver a return of between minus 3 per cent and minus 4 per cent over the next 10 years, he said. “Where we are right now is not a good place to start.”
Cooper, a former asset consultant, was talking his own book to a certain extent. Schroders has been possibly the most successful fund manager in Australia in what is being sold as a new style of investing: multi-asset class investments. The several providers of these strategies are at pains to point out the differences between them and the old balanced funds of the 1980s and 1990s. The main difference, however, is their complexity. Some of them, such as State Street Global Advisors’ product and that of Russell Investments, involve more than 20 asset sub-classes and the constant use of derivatives. And they are not cheap.
Nevertheless, they appear to be increasingly popular for both super funds and individuals wary of another GFC-type event. Sinclair Schofield, a vice president and head of sales for State Street Global Services (the separate custody arm of State Street which services both fund managers and super funds) told the conference that Australia looked like being the fastest adopter of multi-asset strategies in the world.
A recent global State Street survey of 300 asset managers, including some from Australia, about 80 per cent of the Australian respondents expected multi-asset solutions to constitute most of their business growth in the next three years.
One of the advantages of multi-asset strategies, he said, was they included both international investments and alternatives. Alternatives were often too illiquid to invest in on a single-investment basis. The shift required a significant structural change in the way some asset managers worked, he said.
Asset managers were also looking to diversify internationally, he said. About 50 per cent of the managers surveyed were looking to capture new opportunities such as getting into overseas markets.
The other major trend for Australian managers was investment insourcing by big super funds, which was gathering pace, Schofield said, and raised questions about what sort of products would be required and the different outcomes clients might be looking for.
