Asset allocation models need to shift away from asset classes to investment outcomes with core beta strategies set to deliver cheaper long-term returns according to an AXA IM senior executive.
AXA IM head of institutional client strategy, Tim Gardener, said chasing alpha in investment returns had become a zero sum or negative sum game and with investors having to choose managers who can return positive alpha over the long-term.
“Alpha hunting is icing on the cake but can be too risky, too elusive and provide too little reward,” Gardener said.
He stated the average defined contribution investors should be considering core beta for a majority of their investment because it was cheap and the most reliable source of investment returns in current markets.
Gardener said that equity beta will be the main engine for growth as it was plentiful, liquid and allowed for liquid access to every asset class available and that smart beta was likely to be used
“Smart beta allows investors to target outcomes in a way that other strategies do not and allows investors to target these outcomes cheaply. The problem with active management is that it is difficult to target a particular outcome because it would limit alpha and to gain alpha would mean an increase in volatility,” Gardener said.
“Have to accept that alpha part of portfolio is used to look for return while the smart beta part can be used to target outcomes and manage volatility and downside protection.”
Gardener also said asset allocation models needed to shift away from a focus on asset classes to outcomes.
“If looking at outcomes we should ask ‘how much do we have in growth assets’ and ‘how much do we want in income assets’, ‘how much liquidity can I tolerate’ and ‘how much cash do I need for immediate liquidity’ – that is where asset allocation should start.”
“That approach is dynamic because as individual as circumstances changes and needs change — this is the starting point.”
