Asset owners need to learn how to take ownership of their assets, by monitoring and in certain cases neutralising some of the bets of their managers to take a total aggregate portfolio view.
Trevor Persaud, managing director for Asean and Taiwan at Russell Investments, said it was key for institutional investors to identify when factors might be able to determine luck versus skill in active managers, and take broader portfolio decisions from there.
“You should know what you own, take a view of where your exposures should be and make sure your portfolio reflects that,” he said at AsianInvestor’s seventh annual Asian Investment Summit at The Conrad Hotel last week.
“Unintended bets are the death of all active managers, but also the cause of most underperformance at an institutional level. This needs to be managed by [asset owners].”
Essentially his position is that very few asset owners have sufficient knowledge of their aggregate positions across all of their managers and all of their portfolios.
He argued they should have multiple lenses, not only looking at performance data but also the characteristics of their holdings and overall risk with a forecast view as an overlay, including scenario analysis and stress testing.
“You need multiple sources to form a view of where you want to be in terms of exposures,” he added. “You won’t necessarily always have strong conviction, but the generic advice if you don’t, or if you think there is skill in information you are receiving from managers around a certain view, is to neutralise those bets rather than take bets where you don’t have strong convictions.”
The bluntest way to do this is to manage the managers’ exposures. Persaud also pointed to other ways, including the use of derivatives, overlays and replicated portfolios.
“The anomaly that people sometimes try to draw attention to is they do not want to dampen the alpha they are getting from managers,” he reflected.
“But there is a way by looking at beta exposures you do not wish to be exposed to and building a beta portfolio that pulls your [overall] portfolio back to more neutral exposures. That should not affect the skill contribution of the active manager.”
Persaud noted that factors as well as asset classes are a key driver of returns; he identified volatility as a key factor during the tech crisis of 2001 and financial crisis of 2008, and value of growth as one of the most important factors in the tech crisis.
“Factors and their impact on a portfolio will be cyclical,” he added, stressing that asset owners who hired managers based on factor exposure would have suffered volatility over this period.
He confirmed that a lot of asset owners believe this is what they pay asset managers for and do not necessarily want to take a view on value versus growth or volatility.
Nevertheless, he concluded factor exposures needed to be managed, as another aspect that institutional investors need to be aware of when it comes to taking greater control of their assets.
Persaud also said asset owners also needed to be aware of the danger of herding. European managers, for instance, have a value tilt in general, he noted, so asset owners need to understand if this is because of having a distinct view, or whether it was due to herding.