Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Target-date technology for outcomes-oriented options
Target-date funds never really took off in Australia. However, the technology behind their delivery may well suit the new and clear trend to outcome-oriented investing. JP Morgan has built an open-architecture system based on its “cash allocation and rebalancing solution” (CARS).
While CARS is not available in Australia, the system should be of interest to funds which have introduced member-directed investment options or are considering doing so.
Basically, it’s an administration system which sits between the multifarious investments which can go to make up a targeted investment outcome – be it to deliver a certain dollar amount or to maximize returns at a certain date – and the custodian.
The problem for Australia is scale. In a case study produced for its global clients, JP Morgan says: “Offering a target-date fund requires coordination across a number of different parties, including investment managers, record keepers, glide path managers, and back office administration providers. An end-to-end, comprehensive solution at a reasonable price point was most desirable.”
AustralianSuper, a JP Morgan custody client, would be one of a handful of Australian funds which could justify the infrastructure build for such a solution. AustralianSuper’s member directed investment option uses FNZ technology coupled with UBS as broker.
