ASSET ALLOCATOR INSIGHT INVESTMENT
with a stated return to
reach (Libor plus 4%); to
get there, he first identifies
the macro, over-riding
theme, works out how to
reflect this in one of his
three portfolios, and then
takes out as much downside
risk as possible.
Ultimately, his asset allocation
process means that
having identified the theme
he then aims to invest in
little other than that theme,
taking out market risk
along the way.
“Part of our process,” he
says, “is looking at where
the risk comes in our portfolio.
We have two basic
elements to our portfolio,
those that provide stability
and those that provide
growth. The split on the
risk side should be 50/50
giving genuine balance in
the portfolio.”
A traditional balanced
portfolio, for example, may
have 50% in equities and
50% in bonds but the risk
is probably 75/25 in favour
of equities. The only thing
that is balanced about this
type of portfolio is the initial
capital allocation.
l Early warning signs
Pinggera is asset class
agnostic when it comes to
portfolio construction, he
has no particular bias
towards any asset segment,
and he assumes that everything
correlates. The
emphasis is on capturing
the upside while identifying
the triggers for a downward
movement and then
acting on it.
“If you look at all the
different assets we held at
the back end of last year,
they were all within about
five days of their high,
across the board – equity,
fixed income, total return,
and so on. For us it was a
great early warning signal
that everything was run-
ning really hard and we
needed to get ready to do
something about it and that
is what we have been
doing. When the market
turns we can do something
to keep the portfolio protected,”
explains fund manager
Steve Waddington.
The fundamental driver
behind what Pinggera and
his team do in terms of
asset allocation is to identify
and select the right
theme that will drive
returns. As a fund of funds
manager, they also spend
time selecting a manager
who will be able to act on
what they believe is the
right theme irrespective of
market activity.
“We do all the work to
get to the point where you
have conviction in a manager,
then want to deploy
the capital that investors
have given us so we invest
in that manager to out-perform.
Our peers will often
take that investment off the
table because the market
moves against them and
this seems counter intuitive.
Why not keep that
exposure to the manager
and take out the market
volatility? You still have the
capital deployed so you
can get that excess return
without the market volatility
and risk behind it,”
Waddington says.
One example of this is
Diversified Target Rtn Fund – Since launch
25
20
15
10
%
5
0
-5
Diversified Target
Return Fund
-10
Mar ’05 Mar ’06
Source: Morningstar
Mar ’07
their investment in the
Ignis Argonaut European
Alpha Fund. The market
has moved against the fund
but they invested in it
because they like the manager
(Barry Norris), his
positioning, and they like
his due diligence process.
“Should we be selling
out of the fund? The answer
is ‘no’ as we like what they
are doing, but we were
concerned that the market
could continue to deteriorate
and it was an equity
investment. So we simply
shorted the future. What
we did was remove the
market risk and that left us
with just the bit we are
attracted to in the first
place,” Waddington said.
l Looking for liquidity
Another must is liquidity,
and property shows how
they asset allocate to get
both exposure to an attractive
theme with the liquidity
they see as necessary.
From conversations with
different managers, internally
and externally, and
their own research, they
saw property companies
down as much as 85%
from their peak yet there
was significant activity to
rebuild balance sheets –
rights issues saw a huge
take-up even though sentiment
was so against the
3m Libor
Mar ’08
SUMMARY
Asset allocation for Insight’s
multi-asset group invests in
a macro theme, providing
liquidity in their portfolios
while taking out equity
market risk.
The portfolios’ balance comes
not from the asset class split
being 50/50 – as the risk is
rarely even – but stability and
growth being split 50/50.
Their process looks for the
macro theme to deliver a
target return, finds the right
vehicle irrespective of asset
class, and then ensures their
exposure is only to the theme
by taking out market risk.
50 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
Mar ’09
underlying asset. Good
assets were available at
distressed prices so, as far
as Pinggera was concerned,
everything was in its
favour.
l Focus on the goal
As Waddington added:
“But property is a liquid
asset class so the simplest
way to get liquidity was
through the companies,
the REITs (real estate
investment trusts), through
an exchange-traded fund.
But what that gave us was
a huge amount of equity
exposure that we did not
want, so we shorted the
FTSE [through a FTSE
future] and that isolated the
property position with a
liquid format. At the same
time we put options on to
replace the market.”
According to Pinggera:
“Our USP is we are absolutely
focused on our target
– these are not positions
designed for a relative
fund. We think there is
great value in these sectors
otherwise we would not
own them. All of the work
we do in terms of idea
generation and portfolio
construction, position management,
is only a means
to an end. The target is the
goal and the focus is on
what we expect to happen,
so what if we are wrong?
“The way we construct
the portfolio, the way we
asset allocate, is far more
about what happens if
things go against us,
because that is what counts.
If we are right and can
identify the ideas, select the
right managers, the right
strategies, the right themes,
we get to our target.
“Look for the theme, get
the ideas, find the right
vehicle and then make sure
we are only taking exposure
to the bit we want.
Get rid of the rest.”
Our USP is we are
absolutely focused
on our target – these
are not positions
designed for a
relative fund. We
think there is great
value in these sectors
otherwise we would
not own them
“
”
Mike Pinggera, head of the
multi-asset group, Insight
Investment
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