Our Governed Range: the impact of tactical asset allocation podcast

24 July 2019

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The impact of tactical asset allocation: A podcast with Trevor Greetham

Trevor Greetham, Head of Multi Asset at RLAM, talks to us about leading tactical asset allocation changes on our Governed Range for three years including the process, what he's most proud of and the challenges of Brexit.

[ Katie ]

Hi, I’m Katie Eagles from the Investment Solutions team at Royal London. Today I'm joined by Trevor Greetham, Head of Multi Asset at Royal London Asset Management and we’re going to discuss the fact that Trevor's been responsible for managing tactical asset allocation changes to our Governed Range for three years now. Trevor, what's your process for deciding on whether any tactical asset allocation changes need to made?

[ Trevor ]

Well, our approach to tactical allocation always starts with research. So, we've looked over many different years of the different factors that impact investment decisions. For example, the Investment Clock model links where we are in the global business cycle to whether you should be overweighting stocks or bonds or commodities or cash. We have other models which look at regional equity decisions or currency decisions for example and we feed these models into a weekly team meeting where our aim is to apply the models in an intelligent way. We don't always do exactly what the model suggests. But if you like, it helps us avoid the sort of behavioural traps you can fall into where you stick with your positions too low or well you do what's been working recently. We look at the models we think very carefully about the environment we're in. We sometimes make adjustments to them and then we apply them in the funds. We also have a monthly meeting which involves the Chief Investment Officer Piers Hillier and heads of each asset class which you can think of more as a kind of Governance meeting around the tactical strategies that we're applying. That all happens prior to implementing changes in the governed range.

[ Katie ]

Now you’ve been responsible for the tactical asset allocation decisions in Governed Range for three years now. How would you rate your performance?

[ Trevor ]

I'm going give myself a six out of 10. Let me explain. We can simulate tactical asset allocation all the way back to 1995 using the Investment Clock and the other models and what we find over that really long period is tactical asset allocation tends to add value about six times in 10. Now you might think that if you were good at doing something six times in 10 you would probably stop doing it because it feels a lot like five times out of 10, doesn't feel that different four times out of 10. But it's a bit like batting averages. If you can be consistently good six times out of 10 month in month out year in year out. That's how you add value in tactical asset allocation. So, over the last three years in the governed range - the governed portfolios, we’ve added about half a percent of additional return for customers a year. We'd like to add a bit more than that. The long-term back test suggests we should be able to add a bit more than that. But even so I think you have to be pretty modest in your aims. Six out of 10 is good enough for us.

[ Katie ]

Great. Any particular tactical asset allocation change you’re most proud of?

[ Trevor ]

I thought you were going to ask which one are we most ashamed of? I mean I don't want to talk too much about the four times out of 10 when it doesn't work out. But seriously you do have to think quite carefully about the times when things aren't working and stick to your process and sort of sometimes that really tests your mettle. I think that the tactical change I'm most proud of in the last three years actually was very recently- it was buying the dip in equity markets quite aggressively in the Governed Portfolios in December of 2018. That December of 2018 was the worst month on Wall Street since the Great Depression in the 1930s. It was a horrible month right up to Christmas Eve when Donald Trump was still tweeting about China and how he was going to get them on trade. Our sentiment indicate that tells us where the markets are in a panic was flashing one of its 10 most extreme bias signals in weekly data going back to 1990. So, in more than 1,000 weeks of data it was saying this was one of the top 10 times when the markets are panicking unnecessarily about a recession. So we stuck with our overweight position we added to our overweight position and equities in December of last year and what we've seen since then is a very sharp recovery in stock markets to new highs. Really on the back of the fact that the Investment Clock has moved out of stagflation where growth is weakening and inflation is rising which is where we were in 2018 through reflation into recovery. So what's been happening is that the drop in the oil price last year took inflation out of the system and now the markets are rallying on the expectation of interest rate cuts starting this month in America and probably giving us a new upswing in the world economy. But that was quite tricky at the time- it was certainly very nerve racking to be buying equities in very large size when all of this stuff was going on in December, but we stuck to our process.

[ Katie ]

Okay, I'm going to say the B word. How does tactical asset allocation help meet the challenges of Brexit related risks?

[ Trevor ]

Right. Well Brexit feels like it's the gift that keeps on giving in terms of risk. I mean I've managed the tactical asset allocation in the Governed Portfolios for over three years and most of that time Brexit has been a major factor. The first thing I say about Brexit risk is the way it impacts portfolios is primarily through the exchange rate. Where we stand at the moment we could leave the EU with no deal at the end of October in which case I would expect the pound to go down quite significantly, maybe 10 or 15 per cent on the foreign exchanges. On the other hand, it's still plausible that Brexit is cancelled altogether. So, if Parliament refuses to back a no deal Brexit and demands a second referendum that could go the other way. You’ve got to keep your mind open to these things and in that scenario I think the pound would go up from its current level by 10 or 15 percent. So, you've got a 20 or 30 per cent range in Sterling based on political events over the next six months which is extraordinary. We're meant to be a developed country that's sort of level of currency risk based on political outcomes is very much an emerging market phenomenon. We're not taking a lot of tactical positions on Brexit because it's so hard to call. Primarily we're thinking of Brexit as something that the strategic asset mix has to cope with. What I mean by that is that we have a mixture in the Governed Portfolios within our growth seeking assets of equities property and commodities and we would expect if we see a no deal exiting the pound goes down a lot we'd expect equity markets to go up. Overseas equities would go up because we're viewing them from a weakening currency standpoint over here in Sterling. The UK equity market sources about 70 percent of its revenues from overseas as well. So, a weakening in the pound is actually quite good for stocks but it would be negative for UK commercial property given the economic disruption that would probably accompany a chaotic departure from the EU. And you can turn that around if we were to cancel Brexit will have some good Brexit deal, the pound would probably go up which would crimp returns from your equity portfolio but property valuations would leap upwards.

There's a degree of natural hedge between equities and property and having both in the mix helps when you've got this degree of uncertainty.

[ Katie ] 

And finally, is there anything that you think sets your tactical process apart in comparison to other multi-asset managers?

[ Trevor ]

Well I've got a bit of experience with this because prior to becoming a fund manager I spent 10 years at an investment bank as a sort of global strategist, travelling around the world meeting asset allocation teams. So, I had the benefit of that if you like seeing first-hand a lot of different investment processes. I think we are more systematic than most people. We avoid the sort of committee based decision making you sometimes see. And I think compared to most people we're more experienced. Our team of eight or nine people has an average investment experience of about 20 years. At the moment, we are in the longest economic expansion that America has seen on record. Records going back to the mid eighteen hundreds. It's been 10 years since the last recession ended. We’d manage money in the last recession which was the great financial crisis. We added a lot of value through tactical asset allocation at that time. So over 2008/09 we added about 9 per cent of additional value in the funds I was managing at that time at Fidelity. So, I think it's a systematic approach, avoiding behavioural traps and an experienced team that's been through difficult markets and has managed to add value at those times.

[ Katie ]

Thank you Trevor and thanks for listening.

[ Trevor ]

Thanks very much everyone.

 

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