After a long history of opposition to tactical asset allocation, Russell Investments has not become a convert but is allowing for a “slower twitch” version of the discipline, says global chief investment officer of the consultant and multimanager, Peter Gunning.
An Australian now resident in Tacoma Beach, Gunning said he had come to appreciate the “rules-based culture” of the United States, and said applying it more to investing could help portfolios “stop falling prey to human emotion”.
Gunning used historical data on US small caps to show that one year of active underperformance by a manager, enough to get them sacked by many investors, was typically followed by three years of outperformance.
Gunning said this monitoring of the cycles of active management was now incorporated into Russell’s multimanager process as a way of reducing behavioural biases.
The suitability of individual markets for active management are also taken into account – for instance UK equities is one of the worst asset classes in the world for active management, in Russell’s opinion, because it has high local investor sophistication, high reporting frequency for companies (less room for price discovery), a relatively narrow and relatively concentrated benchmark, and high transaction costs (at least 50bps a trade, Gunning says).
Gunning said Russell is shifting internal resources toward areas of larger alpha opportunity, and expanding its research universe into new betas such as closed-end funds, green investing, natural resources, public private partnerships, agriculture and, through the “Edge Strategies Group” established by Gunning, insurance-based asset classes such as catastrophe bonds.
He made it clear that Russell, which has $151 billion in assets under management, was prepared to only take passive exposure to areas where it could sense no competitive advantage in eking out alpha.
Gunning also advised against auto-rebalancing, saying Russell had developed the ability to take tilts of up to 5 per cent away from long-term strategic asset allocation in its global diversified funds.
Russell has to manage this discretion carefully, advising its “traditional” advisory clients of its plans before implementing the tilts in its funds.