DWS, formerly known as Deutsche Asset Management, has extended marketing of its Multi Asset Solutions unit’s range of strategies in Australia and New Zealand, following rapid success in Asia over the past couple of years. One of the unique tools used is called ‘group risk in portfolios’ (GRIP).
On his first visit to Australia, Nicolas Didelot, a DWS director and head of multi-asset investment specialists, based in Frankfurt, said last week that he expected that the higher-octane Multi Asset Total Return Unconstrained strategy (TRU) would prove particularly popular if its take-up followed the Asian trend.
Didelot was a key person in the launch of the range in Asia from 2015, where it has received more than EUR 2 billion ($A3.2 billion) in under three years. About 90 per cent of the flows have been into the TRU strategy.
His trip coincided with the publication of a white paper entitled ‘Time to Get a GRIP on Asset Allocation’, which demonstrates the benefits of introducing the new way of quantifying risk into the strategic asset allocation process.
Didelot said that GRIP blended the traditional measure of risk parity and mean variance, which had the effect of “rebalancing” the risk profile of the portfolio. It grouped (the ‘G’ in GRIP) asset classes which were highly correlated with each other into clusters, which reduced the dilution of the risk optimising in the process.
The four main steps were:
- mean variance optimisation to get the allocation
- group risk parity to “equalise” the return and end up with a more stable portfolio
- build the asset class exposure, and
- apply, potentially, a tactical asset allocation overlay.
“Our value add is that we have a more balanced portfolio,” he said. “We have been using it for two years as an enhancement to our long-established capability.”
The Multi Asset Core strategy is the one that currently uses GRIP. It is the strategy which is most-often customised at the request of big investors. The strategic asset allocation is set by the investment team and tactical allocation using a mix of quant and fundamental analysis.
The multi-asset group strategies have been around for about 30 years and total EUR 103 billion of DWS’s EUR 700 billion in assets globally. There are at least eight strategies including risk and tactical overlays.
With respect to TRU, a team of nine investment professionals operates in a boutique style and is led by DWS veteran Klaus Kaldemorgen. The main strategy is even named after him in Germany – DWS Concept Kaldemorgen. The main return driver comes from top-down allocation decisions across equities, currency, credit and duration.
The team uses a risk allocation approach instead of a traditional asset allocation approach, so there is no adherence to an ‘anchor’ portfolio. The team’s track record goes back to 2002. The original strategy, ‘Deutsche Multi Opportunities’, was designed for one of Germany’s largest single-family offices. Since the risk management process was upgraded in 2011 is has had an annualised return of 7.04 per cent. A ‘Dynamic Opportunities’ version has had a return of 14.84 per cent since 2013.
Didelot sees his Asian experience as being a blueprint for other regions, such as Australia and New Zealand, which tend to look for more growth-oriented investments than European institutions.
Alex Francois, Sydney-based director of sales, says the strategies are well-suited to the current climate, generally considered to be late in the cycle. They tend to outperform in non-trending markets which require nimbleness and flexibility and have the benefit of strong controls for volatility and drawdown.
“It’s good to have an asymmetric profile because it sometimes takes a long while to recover from a drawdown,” Didelot says.