Home / Australia leads the way with ‘buddy approach’ to DAA

(Pictured: Michael Kelly)

As super funds increasingly look to adopt a more outcomes-orientated approach to the governance of their assets, one interesting fall-out has been the trend to create a new bucket in their asset allocation for several multi-strategy managers.

Sometimes called “the new balanced”, multi-strategy funds use dynamic asset allocation (DAA) skills to target a specific return which can be dialed up or down by the client depending on its risk tolerance.

PineBridge, the US-based global manager which has had Australian representation for a long time, has recently been promoting this approach and plans to launch an Australian-domiciled fund later this year. It currently offers discrete mandates for larger clients.

As previously reported (see ‘Strategic partnerships becoming just that’ on this website, first published in May), Texas Teachers, the big US public sector fund, is the poster child for this approach. Texas Teachers employed Neuberger Berman, which has also had a strong Australian presence for some time, along with five other managers for about US$5 billion of its assets.

Michael Kelly, managing director and global head of AA at PineBridge, visited Australia again last week to speak with funds and consultants, alongside local managing director Clint Grobler. Kelly said Australia was probably more advanced than the US in the new use of DAA.

PineBridge calls it “the buddy approach”, since the relationships between client fund and managers tend to be a lot closer and deeper than has been the norm with traditional investment mandates.

Kelly, a fund management veteran who has been with PineBride and its predecessor for 15 years, says that there has been more change in thinking around AA in the last five years than in the previous 30 years.

“And it’s not just thinking about ideas, it’s also about processes,” he says. One of PineBridge’s points of differentiation is that it is not a big fan of synthetics, using derivatives only for efficiency reasons. It is always long-only. Multi-strat funds can often be very complex.

He says that in Australia the environment seems more accepting of a ‘CPI-plus’ approach to target for investments. Typically for a big super fund, Kelly says, this will be CPI plus 4 per cent on a rolling three-year period.

But the “buddy” element is particularly interesting. What seems to be happening is that when these mandates are awarded and the new relationships blossom, the in-house investment teams at the client fund tend to change some of their behaviours.

“By blending the styles and the [multi-strat] managers, they can get a broader idea set. For 5 per cent [of the assets] they can import a lot of intellectual capacity without making much of a dent in their total expense ratio,” Kelly says. “They’re usually not telling us how to manage the money or to ramp up the risk.”

The internal staff of pension funds tend to “become more opportunistic” with their own decision making and have “grander designs”.

He believes that DAA strategies are easier for pension fund investment committees to understand than shorter-term tactical asset allocation strategies. “DAA is about fundamentals and valuations and most people can understand that,” he says. “It’s a batting-average game rather than a bet-the-ranch game.”

Meanwhile, PineBridge is expanding its Melbourne office with the recent recruitment of Michael Bowen, a business development manager at Sheridan Lee’s third-party marketing company, Shed Enterprises.

Bowen, who joined the fund management industry at Rainmaker Information several years ago, moves from Sydney to Melbourne and starts his new role next month.