“Who would be an asset allocator?” I wondered in this space a month or so back on the basis that, had you been armed wi th the curious gift of perfect macroeconomic foresight at the start of last year, you would still have had a hard time picking the eventual winners in the 2011 Asset Class Stakes. I mean, index-linked gilts? You would have struck a line through that pony straightaway.
Approaching the subject from the opposite direction this time, one of the more interesting investment interviews I have had this year was with a fund manager who, last March, had a fi fth of his portfolio in one 30-year 4.7% Treasury and may very well also have been wondering “Who would be an asset allocator?” For this decision was not winning him a lot of love from clients – and it goes without saying this was a retail portfolio as manager-abuse is surely not something that happens in the institutional world. Still, when they found themselves the benefi ciaries of the single most crucial asset allocation call of 2011, I would hope even retail investors would have had the grace to apologise. The fund manager in question was M&G’s Steven Andrew, who in the course of outlining his investment process to me winningly described himself as an “antiforecaster”. “We have no idea what will happen next,” he explained. “We do our best to understand where we are today and how we got here and then try and apply that understanding to information as it comes in. If that changes the facts, we are happy to change our opinion on a price but, if it does not change those facts but the price changes, we pay attention. It might be an opportunity. All we are trying to identify is a dislocation between what the market is saying and what the price is doing. Much of our thinking comes back to the nature of risk in the context of the price. What am I paying for this asset in terms of access to the future earnings and dividend stream of an equity, or to the future coupon payments and principal of a bond? How is it priced today relative to what this asset has delivered over time and is that cheap or expensive? “Then, because it is not good enough simply to identify what is cheap and what is dear, we will ask ourselves if we have an argument with the market.” Last year Andrew had an absolute ding-dong of an argu ment with the market – and won. I will leave you with one last thought from him on the subject of risk: “Investors should be asking themselves every day what the risk is in their portfolio. What is the risk of losing money? This ‘traditional’ notion of government bonds equating to a safe haven is at best incomplete. How much are you paying for that safe haven? You could be overpaying for insurance that may not even cover you in the event something goes wrong.”
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