Issue: June/August 09
Add some alpha to your beta
Deputy Managing Director of UMBONO Fund Managers
Collaboration is one of the many benefits in the multi-boutique structure of Old Mutual Investment Group SA (OMIGSA). This is apparent in the launch of a new fund which sees the seemingly contrary investment styles of Macro Strategy Investments’ (MSI) active asset allocation combine with the tracker approach of Umbono Fund Managers. The result is the Old Mutual Active Beta Global Balanced Fund.
It heralds a new age of investment choice for investors wanting consistency, cost efficiency and growth potential in a single package. Comprising a balanced mix of local and offshore equities, quoted property, bonds and money market instruments, the portfolio has a long-term real return target of CPI + 5% a year.
As a fully-diversified investment, compliant with Regulation 28, it could prove an attractive choice for pension funds, as well as members of individual-choice pension funds.
Numerous studies have demonstrated that asset allocation accounts for a significant proportion of investment returns. For one, an analysis by Ibbotson & Kaplan (Financial Analysts Journal, 2000) shows that asset allocation explains about 90% of the variability of a fund’s return over time.
The local selection of bond and equity index-tracker funds is managed by Umbono Fund Managers, with cash management in the hands of fixed-income specialists Futuregrowth (also in the OMIGSA stable).
In addition, the fund’s mandated allowance of a 20% offshore exposure is via Exchange Traded Funds (ETFs) based on international indices corresponding to the required portfolio allocations. The suite of global managers includes Barclays, State Street, Vanguard, Claymore and Invesco.
Benefits of combination
Active asset allocation offers access to extensive research and the skills required to take advantage of market opportunities, while avoiding underperformance as a result of over-exposure to negatively-performing asset classes and economies. In backtesting the fund, the actual asset allocation decisions made by the MSI team were applied to the representative indices for each asset class. The resulting outperformance – over a static asset allocation fund – averaged 1,1% a year.
Tracker investing provides the benefits of substantially lower fees and significantly reduced uncertainty around performance within each asset class, relative to the market. The blend of these seemingly opposed investment approaches has potential to deliver efficient market outperformance. In essence, the active management aspect provides potential for alpha over and above the beta provided by index-tracker funds.