Speaking to Craig Allen of Rand Merchant Bank International's (RMBI's) Model Portfolio Team provided an analogous experience to a discussion with marketing guru Mark Bibbings. Bear with the gorilla for a second; it's a great insight into model portfolio construction.
Bibbings was making the point that many companies go through an expensive and thorough marketing audit yet end up with an ugly marketing strategy.
Lip service to strategy is paid by the boss and troops, but in practice the "substance" of strategy is not implemented in a disciplined fashion. "A gorilla with lipstick" read the article Bibbings used to make the point. The marketing make-up, badly employed, does not hide the fact that strategy looks ugly.
And so to models, portfolios that is. Anyone can make money in a rising market, "and anyone can pick assets short term" says Craig Allen, "our objective is to protect investors over the long term by providing a consistent return through a diversified portfolio.
Delivery takes place by way of a simple transparent portfolio on one piece of paper". This all sounds very familiar and there are a lot of models out there with precisely the same objectives wearing precisely the same make-up. Gorillas with lipstick.
The RMBI approach differs in substance from the many to create the "beautiful" approach.
The RMBI team sits on London Bridge thinking its way through processes and theories. More accurately, according to Allen, the thinking is based on three themes: a quantitative approach where numbers and statistics drive the results; the qualitative approach, which would involve interviews with a range of different fund managers; and intuition based on asset class research.
Ultimately, the RMBI models are constructed on the "fund of funds" basis. This means maintaining a watch on thousands of funds and interviewing some 400 fund managers a year.
The alpha performance coming from a mix of the time invested into the fund manager meetings and the asset class research.
Three perspectives provide a clue as to what differentiates the RMBI approach from many others. Perspective number one relates to top-down, macro-economic thinking.
The team works on five models: conservative, bond, balanced, aggressive and equities. This makes appropriate client "risk-assessment" absolutely critical.
Current macro-thinking for the "balanced portfolio" for example, would weight the portfolio heavily towards equities (48 per cent), reflecting a negative view on bonds (37 per cent), with hedge funds picking up the 15 per cent slack. This is as about as aggressive as you can be within a "balanced" prop-osition.
In contrast the "aggressive" portfolio is currently weighted at 72 per cent equities, 8 per cent bonds and 20 per cent hedge. Now throw in a currency component that weights 40 per cent towards US dollar assets, 20 per cent euro assets, 20 per cent yen assets, 10 per cent Asian assets and 10 per cent to the rest, and you have a complete picture on where the team thinks the current performance drivers are.
Perspective two relates to what might be termed "tactical" thinking. What does the team think of the specific global markets? A quick round up can serve as a guide, "equities over bonds for starters" says Allen.
On the equity front, Japan remains a favourite. For two years Glyn Owen, who manages the "beautiful team", has been talking up Japanese equities for Gulf News readers in his year-end predictions. With the Nikkei and Topix indices finely on the rise he can claim some success.
"This illustrates our philosophy" says Allen, "we stayed faithful to Japanese equities between June 2004 and June 2005 when US investors would have achieved a zero performance, now the results have improved the wealth of RMBI investors and vindicated our research". They remain faithful to Japan with extended confidence in Asia ex-Japan. Anything more specific?
I ask, "not Australia, and not China "A" shares (Chinese government shares)", but yes to India and China (especially via Hong Kong).
"There are some concerns in Asia" continues Allen, "where Taiwan and Indonesia have been poor, but the problems aren't contagious". Hopefully bird flu won't do a Sars.
Outside of things Asian, Europe remains "interesting" because companies continue to do well despite any "effective government in Germany, Italy, and a French "no" to Europe". The significance of a leaderless Europe?
"One is a weaker currency, the other is that our stock selections will be on a stock picking basis- highly selective", says Allen.
They also take a dimmish view of the US, "which will continue to underperform and remains over-valued", although it is pertinent to point out that "under performance" is against other equity markets and not against bonds, so for US dollar investors this is not an instruction to sell your US equities en masse.
Bonds then, create the most angst where Allen warns that RMBI will be steering away from Japanese Bonds, and are disrespectful of US bonds where returns will not significantly beat cash.
You can't complete the tactical overview without the hedge scene where Allen's team will target an absolute 8 per cent "or the risk free rate multiplied by two", especially where long/short hedge strategies are worked into the fund of fund mix. Without the long/short hedge approach Allen's target reduces to five per cent for the year.
For perspective three, let's mix the other two perspectives together by way of the Japanese example. The macro-approach pushed the beautiful team into a heavy equity weighting into Japan.
RMBI created a "watch list" of some 40 funds, and visited a number of Japanese equity fund managers. Unfortunately, the group of 40 largely underperformed the rampant Topix index used as the benchmark. Bad news?
"Not so", says Allen, "our over-weight position in Japanese equities provided the out-performance and this provides a solid example of how management and tactical asset allocation is the key determinant of performance".
Sounding very much like Prof Brinson's studies on performance which ends with the conclusion that asset allocation influences performance by a factor of some 90 per cent plus…not market timing, not the purchase of specific assets.
So beauty is not just in the eye of the beholder when it boils down to medium term performance consistency, it comes down, it seems, to how well you position your asset allocation.
- The writer is Managing Director of Mondial (Dubai) LLC.
Gulf News
