Yoram Lustig, head of multi-asset investments at Axa Investment Managers, says it is not useful that the UK market is driven by a small number of large caps stocks combined with a strong pound and that a strong home bias should belong to the past.
“The way to manage recovery is to go global. There are headwinds in the UK – debts are the weakest link – and so we allocate across asset classes and regions,” says Lustig. “If diversified growth is allocated across risk factors, it will not be concentrated in those you don’t wish to be in.”
A LITTLE BIT OF DIVERSIFICATION
But just how diversified are defaults, if the headline exposures are not as it says on the tin? It all depends on the funds, says Lustig: “Every provider has its own philosophy and way of doing things – so there is a divergence of approach.”
Though smart beta has been used as a catch-all phrase with regard to defaults, it all comes down to how the theory is applied.
“Some say there should be hundreds of factors, but we say that’s a mistake,” says Lustig. “You should complement your risk factors and smart beta offers better spreads and securities as you’re not as concentrated.” This allows you to avoid pitfalls by not taking unrewarded risk, he adds.
Nicola Rawlinson, a client portfolio manager in the global multi-asset group of JP Morgan Asset Management, says members should have exposure to multiple asset classes to reap the benefits of diversification throughout the glidepath.
“We believe it can benefit the portfolio throughout the glide path, and we therefore designed our UK glide path with fixed income from the beginning in an 85% equity/ 15% fixed income portfolio.
“We believe this reduced volatility profile is important particularly in a portfolio where the cashflows coming in can be volatile – for instance changing contributions – and where members could be discouraged from contributing more or even at all, if they experience volatility.”
BLINDED WITH SCIENCE
Simon Chinnery, head of UK DC for JP Morgan Asset Management, says some consultants would appear to be developing defaults simply by adding more diversified growth funds (DGFs) to the mix. He cites a recent example he saw where the consultant has placed three of these funds into the default.
“They have allocated a third to each and there might be a science behind it. If you need to diversify, one may look a little more like a balanced fund, and another like absolute return. “This is all fine in isolation, but how does it get blended into risk dynamics?”
Brian Henderson, partner, and head of UK DC and savings at Mercer, says with more than 90% of people in defaults, he has been trying to drive down domestic exposures for some time and take on “a more global view”.
Henderson recommends building well-diversified funds rather than bolting on DGFs, but some DGFs have been hugely successful and in five years, there will be more money in DC than DB for accumulation – much of it in DGFs.
“The reason we have a mixture of passive equity and DGF is because when it first came in five or six years ago, it was blended with passive equity because it was new and trustees didn’t want to put all their eggs in one basket,” says Henderson.
However, the charge cap is now influencing fund choice and some schemes are moving away from DGFs – “a case of the tail wagging the dog”, says Henderson. The reason is simple – admin charges can swallow up half the 75 basis points (bps), unless it is a trust-based scheme, with an unbundled arrangement. If bundled the management charge will typically be around 35bps which makes it difficult to deliver passive vehicles with active asset allocation.
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