Most KiwiSaver manager tactical tilts against strategic asset allocation (SAA) benchmarks have failed to pay off, a new Melville Jessup Weaver (MJW) analysis reveals.
The MJW study of 10 KiwiSaver managers found tactical asset allocation (TAA) – or actual portfolio deviations from the fund SAAs – at best added 0.4 per cent over the three years to June 30, 2018.
“There is an almost even split of those that have added value and those that have detracted value,” the MJW report says. “Four of the ten managers added value over the period and the average result is close to zero (-0.1% pa).”
Across the scale, Nikko (as underlying manager in the AMP KiwiSaver scheme) added 0.4 per cent to returns via TAA, under the MJW analysis, while ANZ’s tactical asset approach detracted some 0.5 per cent from returns over the period.
The MJW research based its findings on applying actual fund asset allocations to idealised static SAA benchmarks.
“We use market index returns in both portfolios to remove the effect of active management within asset sectors. Thus, the difference between the two captures just the asset allocation effect,” the paper says.
Most of the 10 KiwiSaver managers under review deviated by 20-30 per cent from their SAAs (as measured by the sum of overweight and underweight positions) with a few outliers: Nikko (7.4 per cent) and Westpac (6.1 per cent) only veering slightly off-benchmark; while Kiwi Wealth was well off-piste with a 61 per cent SAA drift.
However, the Kiwi Wealth anomaly was due to a global bond allocation (against a zero weighting in its SAA) with the Wellington-based manager actually hewing close to its income/growth settings in aggregate.
Regardless of big single asset class TAA bets, the MJW study notes managers can still tilt towards growth or income according to their respective market views. And on average the KiwiSaver managers in the research have been bearish during a period that saw equity markets roaring upwards.
“The average tilt to income assets is 0.5% as at June 2018 and was as high as 2.1% in December 2016. Mercer is a notable exception and AMPCI and ANZ have also moved to more bullish positioning,” the MJW report says. “The last two and half years have seen a very strong market for equities and so a pessimistic view would have proved incorrect.”
Ben Trollip, MJW principal, said diversified fund managers inevitably drift from their SAAs over time. But while some have regular ‘mechanical’ rebalancing rules, others may let off-benchmark asset allocation positions run or actively reweight portfolios according to tactical asset class bets.
Trollip said funds should disclose any TAA or rebalancing strategies in Statement of Investment Policy and Objectives (SIPO) documents to give investors an idea of the risks involved.
He said TAA could distract from the SAA settings, which were more important in determining long-term returns.
“Our view is that funds get better mileage out of getting the SAA right than TAA,” he said.