We do not see it just as a case of deciding on the most appropriate split between asset classes, nor is it a case of looking at an atlas and deciding on which countries might do well this year. We view it as a function of opportunity cost and risk aversion. We want to make sure clients’ money is exposed to the best money-making ideas we can find, subject to a given set of risk constraints. We also want to minimise the chances of losing money.
There are various ways to do this. Having the best quality fund managers is crucial because, in the long run, you can be confident your clients’ money is in safe hands but there are other ways to maximise returns. Great fund managers may be expected to beat their benchmarks consistently but that does not mean they will be the best performers in all conditions. The core of our portfolios is centred on quality names but we also select managers on the basis of how well suited their style or area of expertise is to market conditions.
We have to make a decision on market conditions and then look at the best managers to fit that view. This is not purely an asset allocation call. Ultimately, whatever view we take, we need the right manager for the job. Some decisions make themselves. For the past three years or so, being overweight in equities has been the most appropriate strategy. Geographical or style biases require considerable deliberation but there are some excellent managers who can help make such decisions easier. In a market such as Latin America, there are a lot of interesting value plays. A fund such as Findlay Park Latin America is an ideal vehicle to access that where, prior to its launch last year, no such opportunity existed, in our opinion.
We also find the asset allocation process helps us take a step back from the daily noise of financial markets. Often, the key to making correct calls lies in identifying the areas of the market that everybody is not talking about. This is the basis for contrarian investing.
If we only ever held decent fund managers capable of beating their benchmarks most of the time, without making asset allocation calls, we would be content with returns that were slightly ahead of our benchmark. This, to us, signals lack of ambition. Relative risk reduction has not helped the pension industry so it is hard to see why it should be a recipe for success in the fund of funds business.
John Chatfeild-Roberts is head of the Jupiter Independent Funds Team.