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If macro is back, who you gonna call?

Is stock picking dead? Fiduciary investors should be starting to wonder, given the cross-sectional volatility of markets over the past three years. But this seems counter-intuitive. Managers have told us we are in a “stock-picker’s paradise”.

Greg Bright*

As is always the case with investment management, there are no easy answers to these questions.

Whether or not more value is likely to be added by the macro beta-related calls over the next year or two, or whether pension funds should continue their love affair with alpha-generating stock pickers – long or short – is certainly an important question.

Most fund investment professionals will be inclined to try to do both, as they have always done: set a strategic asset allocation, allow for tactical tilts and look to also add value through skill-based bottom-up management.

But here is the rub: the whole funds management industry went through a massive change, away from “balanced” management from the late 1980s and towards “sector specialisation”, prompted by the rising influence of big asset consulting firms.

Notwithstanding a flirtation with TAA (tactical asset allocation) overlays and funds around the mid-1990s, which Americans tended to think of as “global balanced”, the most successful managers of the past 20 years have been specialist equities or bond managers. They have added value largely through their securities selection.

Before the global crisis, TAA managers re-emerged as “global macro” hedge funds and at a time when all alpha-seeking strategies were sought after, did quite well.

But, they were really only operating within the small alternatives allocations of funds. They were not dictating big shifts in allocations which would have a significant impact on funds.

Now, people are starting to question whether the era of “micro management”, or stock-picking, is over, at least for the time being.

A recent paper by Morgan Stanley Investment Management in the US, suggests, for instance, that we may be going “Back to the ’70s, with a Twist”. The manager’s “thought leadership” team says: “We think that there is a secular shift underway towards macro investing.”

There are several questions for pension funds which follow, if this is true.

First, who should make asset allocation decisions, irrespective of the time period – the funds themselves, their asset consultants, or managers?

Second, whoever does it, are they any good as a whole at asset allocation?

Third, what sort of resources should be put into these decisions?

The whole industry has spent the past 20 years, it seems, in a largely micro world. Asset allocation has been the realm of the pension funds themselves. Asset consultants have openly expressed more confidence in picking bottom-up managers than the top-down variety.

Taking a step back, the development of specialist TAA services followed a period of increasing evidence that managers could not time markets very well. It was thought that to do so, they had to have separate teams which were not encumbered by other asset management responsibilities in whatever sectors.

When TAA fell out of favour in the late 1990s, with the onset of the tech boom, pension funds became increasingly reluctant to give up the decisions of tilting asset allocation to their outsourced providers.

Notwithstanding the rise of global macro from the mid-2010s, pension funds, with the advice of asset consultants, made the big calls – or more often, didn’t.

The problem with pension funds making those decisions is that only the very large funds have the resources which are likely to lead to them doing a good job at it. And, for the most part, they spend less time and money on asset allocation than they do on the selection of individual sector managers.

Morgan Stanley says that key to its thinking is that three forces will be at work for some time. These are: re-regulation or outsized government involvement; extreme monetary policies throughout the world; and, globalisation.

The manager does not look to answer the fundamental question of who should be making the big macro calls. But if you doubt whether this will be the way pension funds can add the most value for their members over the next year or two, then check the full paper on: www.morganstanley.com in the investment management section under “thought leadership”.

Greg Bright is the Beijing-based publisher of Top1000Funds.com

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