Slowly learning asset allocation lessons

Allocation, allocation, allocation is the new mantra for private bankers in Europe and beyond. Sure, there is nothing new about the importance of asset allocation. Gary Brinson – one of the most influential names in the history of institutional investment – wrote his landmark study into this art in 1986. But it has taken 20 years for many banks to catch on, while product-led, commission-based investment advisers are still reluctant to board the allocation train. Speak to some of the chief investment officers and economists at the biggest European and US distributors, however, and the message is a clear one. It really does not matter which funds, managers or types of products you select, they argue. Sure, there can be extra alpha added by some particularly talented individuals, but this is difficult indeed to track down. But invest in the correct geographical areas and global investment themes, and you are on to a winner. It is a case of clients listening to the investment committees on the big allocation calls, and then populating their allocations with products which they favour as long as they can get into the market quickly. Deutsche Bank and Credit Suisse have both previously been frustrated at the lack of mutual funds available – both internally and from external partners – to populate the favoured allocations of their investment chiefs. This has particularly been true in the areas of commodities and some emerging markets. But developments in structured products, launches of new emerging market vehicles and the huge expansion of exchange traded funds has made the job easier for the economists, private bankers and clients. Private customers are still obsessed with brands, as they want to make sure a company they have invested with has the strength to still be standing six months later. They still want their advisers’ to select a blockbuster fund, even when markets are not favourable. But the fact that they are thinking about selecting the correct markets and allocations is seen by a reluctance to invest in certain areas, such as emerging markets and technology, where fingers have previously been burned. Even if investors’ behaviour is negative, it is evidence that the asset allocation lesson is slowly being learned.