NEW YORK -- Money managers are meeting with mixed success in their efforts to persuade pension funds that global tactical asset allocation as a hedge if the market falls -- as it did recently.
"It's a major step. We're not convinced it can add value," said David Long, executive director of the $1.1 billion Houston Municipal Employees' Pension System.
Through derivatives or futures, money managers use GTAA as an overlay on underlying assets to move quickly into and out of markets.
Funds also allow the money manager to overweight or underweight a benchmark and the managers accordingly make tactical or short-term investment decisions.
GTAA also can be a separate asset allocation within a portfolio.
Not all funds, however, have opted out of adding GTAA.
Polaroid Corp., for example, added GTAA at the start of the year to its defined contribution and defined benefit plans, said Philip Ruddick, vice president.
On Jan. 1, the Cambridge, Mass.-based company shifted $30 million in its defined benefit plan to GTAA after pulling out of investments in Asia last year, Mr. Ruddick said.
GTAA is a separate account in its 401(k) plan and was "offered to employees" in June, he said.
The Polaroid plans, which total $2.3 billion, use Mellon Capital Management, San Francisco, as their global tactical asset allocation manager, in part because of a previous relationship, Mr. Ruddick said. Polaroid added domestic TAA with Mellon Capital in 1991.
General Motors Investment Management Corp.New York, which oversees the $75 billion General Motors Corp. pension fund, has allocated $1.5 billion to GTAA. It hired four firms: Mellon Capital; First Quadrant LP, Pasadena, Calif.; Goldman Sachs Asset Management, New York; and Morgan Stanley Asset Management Inc., New York, to manage GTAA portfolios and created a fifth portfolio to be managed internally.
"Performance is satisfactory and to our expectation," said R. Charles Tschampion, managing director of investment strategy and asset allocation group. Mr. Tschampion said he would not comment on the portfolios' returns.
Only a few money managers offer GTAA by using futures as an asset overlay. They include the firms hired by GMIMCo as well as PanAgora Asset Management, Boston, and J.P. Morgan Investment Management, New York.
Global tactical asset allocation can "provide downside protection in a diversified way," said Peter Rathjens, PanAgora's global investment officer. "With GTAA, you don't get out of an asset class as a whole" but can quickly shift money, for example, from U.S. to European equities.
So far this year, the Boston-based money manager has added three GTAA clients, Mr. Rathjens said. Although he wouldn't name them, he said one fund is in Europe and two are in North America, including "one of the largest North American public pension plans."
Two existing clients are likely to switch from a "narrow TAA to GTAA" by the end of August, Mr. Rathjens said.
PanAgora manages between $3 billion and $3.5 billion in GTAA and similar strategies and manages close to $17 billion in total, Mr. Rathjens said.
PanAgora has a mandate to move up to 10% of the portfolio from a specific asset class, Mr. Rathjens said.
At J.P. Morgan, new GTAA investment at J.P. Morgan totaled $100 million through May, bringing its total to $2.1 billion.
That's after two years of sharp growth. From December 1995 to December 1997, J.P. Morgan saw assets in GTAA accounts increase to $2 billion from $674 million, said Larry Smith, managing director and global head of asset allocation.
But the strategy clearly is not for all pension funds.
The Houston municipal fund weighed the possibility of adding GTAA last year, but in the end decided not to bring it to the board's attention, Mr. Long said.
The current market's volatility made Houston Municipal shy away from a new investment strategy, Mr. Long said.
"This market is atypical. It kind of makes you feel cautious about taking a major step to something different," he said.
Another Houston-area fund stayed away from global tactical asset allocation because it did not want to lose control of its asset allocation.
"We should be the ones controlling the asset allocation aspect of the portfolio and would lose that with GTAA," said Danny J. Bowers Jr., chief investment officer for the $1.55 billion Houston Firefighters' Relief & Retirement Fund.
Board members felt they knew "the proper asset mix for our liability structure," Mr. Bowers said.
The $105 billion New York State Common Retirement Fund, Albany, has "considered a form of GTAA," said spokesman Jeffrey Gordon. The fund is not investing currently, but is evaluating whether it needs to add the strategy "on an ongoing basis."
At consultant Frank Russell Co., Tacoma, Wash., global tactical asset allocation is near the bottom of the "menu of options" clients have to add value to their portfolios, said James Thames, a research analyst.
"Would we put GTAA forward to a client as the first alternative to add value? No," he said.
Some money managers say the real worth of GTAA is as a hedge against overvalued markets.
"When markets become overvalued, GTAA will underweight a market" such as U.S. equities, said Rick Roberts, marketing director for First Quadrant. He admitted there are potential shortcomings to this strategy.
"Any plan that uses GTAA actually would have underweighted the U.S. and overweighted Japan. If you had done that, it would have been a painful decision," he said.
In the past 12 months, one of First Quadrant's institutional clients has converted to global tactical asset allocation from a TAA account and three are seriously considering a similar move, Mr. Roberts said. Two new clients included GTAA in a "multiproduct relationship," Mr. Roberts said.
He ranked corporate funds as the most willing to consider adding GTAA, followed by endowments and then public pension funds.
GTAA is a "balancing vehicle," said Tom Loeb, chairman and chief executive officer of Mellon Capital in San Francisco, which manages $3 billion in GTAA accounts.
"It stands in the middle of a variety of assets" such as U.S. stocks and international stocks or domestic bonds and international bonds. A fund will "carve out 10% of those pieces and put that into a GTAA account" as an overlay, he said.
Some plans add GTAA to "ensure they remain in equities as long as possible," said First Quadrant's Mr. Roberts.
Mr. Rathjens of PanAgora stressed GTAA's ability to offset risk. "The moment the U.S. market has two bad months, people will be looking for cover in a hurry."
