Love affair with global TAA strategies cooling down

New money going into global tactical asset allocation is slowing to a trickle after years of substantial inflows.

For the first quarter of this year, the strategy attracted only $1.74 billion in net inflows, vs. $14.4 billion for the first quarter of 2014, according to eVestment LLC, Marietta, Ga.

At that rate, inflows would total less than $7 billion for all of 2015. That would be a huge drop from what eVestment said was $30 billion in calendar year 2014 and $61 billion in 2013.

As for performance, unhedged GTAA portfolios returned 2.7% for the year ended March 31, and an annualized 6.6% for both the five- and 10-year periods.

Hedged GTAA portfolios returned 3.7% for the one-year period, an annualized 6.8% for five years and an annualized 7.8% for 10 years.

Investment consultants and GTAA managers say the numbers do not reflect newer strategies or products or substantial allocations already made, and they see more reasons than ever to recommend it.

“Our view is that it (GTAA) should be considered a core building block for most portfolios. We use it in many ways,” said Steven F. Charlton, partner and director of consulting services at investment consultant NEPC LLC, Cambridge, Mass..

More than half of NEPC's clients have allocated up to 20% each to GTAA.

At Rocaton Investment Advisors LLC, Norwalk, Conn., Matt Maleri, managing director of asset allocation, said: “We are definitely hearing interest among clients, and the market environment we are in now is largely responsible. They're really looking for anything that can generate a return, and risk is certainly at the forefront.”

GTAA strategies differ by asset class, implementation method and timing. Some managers try to add alpha through security selection while others actively use beta strategies, such as passive exchange-traded funds. But they are all designed to reduce risk through diversification and tactical shifts among asset classes.

“Risk is where you start the (GTAA) conversation with the asset owner,” said Tim Barron, chief investment officer at consultant Segal Rogerscasey in Darien, Conn. “The goals and objectives all come in the camp of less beta, but they can be from really stable sources with low risk.”

There are more choices now for GTAA managers to offer. “They can use one chassis and create a variety of solutions for clients. There are a lot more arrows in the quiver. Fifteen years ago, it was stocks and bonds. Fast forward and it is derivatives, ETFs and many more asset types that they can create. Things are more tactical now,” Mr. Barron said.

“GTAA is a flavor that is evolving over time. Over the last 10 years, (GTAA) managers have begun to branch out. It's diversifying by different styles,” said Brian Singer, partner and head of the dynamic allocation strategies team at William Blair & Co. in Chicago, a GTAA manager with $1.5 billion in macro diversification strategies as of March 31.

Leading money management firms including Wellington Management Co. LLP and J.P. Morgan Asset Management have developed GTAA offerings that offer risk parity and can be more tactical to fit asset owners' needs, consultants said.

For foundations and endowments, that can mean GTAA strategies that are inflation based to protect assets, or even income- oriented, consultants say.

For corporate defined benefit plans, “it can be the alpha engine for LDI,” Mr. Barron said.

Rocaton is seeing more GTAA in defined contribution plans, where plan executives are starting to use it as a stand-alone option, or in a multiasset or inflation-protection allocations. “It tends to work pretty well in a DC plan,” Mr. Maleri said. “It doesn't overlap with most of their exposures. It has a tactical element to it which arguably is unique, and it gives exposure to certain markets that are probably not suitable on a stand-alone basis.”

Plan participants can have access to commodities or currencies, “but they are getting it in a much more controlled way,” Mr. Maleri said.

GTAA's attraction for managers with new approaches might be one reason growth has slowed for firms that have offered GTAA for a while, such as Grantham, Mayo, Van Otterloo & Co. LLC; Newton Group; Pacific Investment Management Co. LLC (subadvised by Research Affiliates LLC); and Wellington.

According to eVestment data, GMO's global tactical asset allocation assets under management dipped 7.4% in the year ended March 31,to $14.1 billion. They increased a tiny 0.8% in the year ended March 31, 2014, and increased 22.7% in the year ended March 31, 2013.

Also, PIMCO's GTAA assets dropped 21% to $48.7 billion in the year ended March 31, and were down 11% the year before. That's in sharp contrast to the 49% gain for the year ended March 31, 2013.

BlackRock Inc.'s GTAA assets held steady during the year ended March 31, at $100.5 billion. But the firm gained 17.2% in the previous year, following a modest increase 0.8% in the year ended March 31, 2013.

Standard Life Investments, by contrast, racked up double-digit gains the last four years, reaching $68 billion as of March 31.

With many GTAA strategies just a few years' old, evaluating strategies and performance is hard. A 2013 study by investment consultant Marquette Associates, Chicago, looked at GTAA strategies with assets of $100 million or more each, and found only 37% had a 10-year track record, and 83% had a five-year record.

“Performance for many (GTAA managers) has been fairly disappointing for last few years,” said NEPC Chief Investment Officer Timothy F. McCusker. “It could be that they are not incorporating (global) central bank policies, which is true for many asset classes. But the skills are there, the breadth is there, so for the most part we say, "stay the course.' It's really about understanding what you are doing.”

One thing Rocaton consultants look for is how well GTAA managers weathered 2008. “There are very few people who have a long-term track record of doing it well,” Mr. Maleri said. “The market has a way of weeding out these types of strategies. It's the absolute performance that will keep firms in business.”

That weeding could happen sooner rather than later, Mr. McCusker said. “There are big economic divergences that are starting to play out and that should play right into GTAA managers' hands. That should be a great way to add value.”

“When the markets are all over the place, that's when GTAA tends to shine,” NEPC's Mr. Charlton said.

Robert Arnott, chairman and CEO of Research Affiliates, Newport Beach, Calif., sees the demand for GTAA waning, but isn't worried.

“The strategies that are equity-centric are still going to have inflows, but those aren't going to help you when the wind dies down; those aren't diversifiers,” Mr. Arnott said. “Diversification is most important when markets are expensive. The people who value diversification are the seasoned long-term investors. Institutional clients have more patience.”

Research Affiliates has $50 billion in GTAA assets that it licenses or subadvises.

“Products like GTAA that are more absolute return tend to be more attractive when you're fairly close to a market meltdown,” Segal Rogerscasey's Mr. Barron said. “Pre-crisis, there was a lot of discussion (about GTAA), and now it's coming back.”

Consultants are also finding a growing sensitivity among asset owners to fees and the downside risk associated with hedge funds, which make comparable GTAA strategies more attractive.

“If it's liquid, there's no reason for it to be packaged up in a partnership. It can be a straightforward fee structure,” William Blair's Mr. Singer said.

Recent search and hire activity in the U.S. includes:

nIn March, the $2.3 billion Oklahoma Firefighters Pension & Retirement System, Oklahoma City, hired Allianz Global Investors to run $50 million in GTAA.

nAlso in March, the $4.4 billion Ventura County (Calif.) Employees' Retirement Association added GTAA with an allocation target of 10%. Fund officials so far have not hired any managers.

nIn January, the $8.1 billion Arizona Public Safety Personnel Retirement System, Phoenix, hired GMO to run up to $130 million in a GTAA fund of funds.

nIn May, the $550 million Alameda-Contra Costa Transit District Retirement System, Oakland, Calif., axed its GTAA allocation, terminating BlackRock Inc., PIMCO and GMO, for performance, a pension fund official said.

GTAA is nothing new for officials at the $2.3 billion Iowa Municipal Fire & Police Retirement System, West Des Moines. In July, they hired the pension fund's third GTAA manager, Schroder Investment Management.

After working with J.P. Morgan and GMO for more than a decade, the pension fund now has 30% of its assets allocated to GTAA.

The Iowa pension fund's GTAA portfolios returned an annualize 7.5% for the 10 years ended March 31, outperforming corresponding asset class benchmarks by 60 basis points annually, said Terry Slattery, executive director.

The pension fund uses GTAA managers “not only to manage their portfolios but to provide their views to us on what they see happening in the markets,” Mr. Slattery said. n