300 Club proposes another way to model investments

Alan Brown, member of the 300 Club and senior adviser at Schroders, says the investment industry needs a new model for best practice that does better than rely on factors such as fund characteristics, regulatory environment and risk preferences.

Brown makes the case in a new paper – Dynamic Asset Allocation and Fund Governance – published by the 300 Club.

He argues that a better outcome is achieved by taking a more dynamic approach to asset allocation, driven by valuation – price of risk assets, risk premia – and wealth.

The asset allocation model as it developed some 30 years ago is no longer able to handle changes in the market, such as the significant growth in the number of asset classes. From four in the 1970s, asset allocators and managers now need to consider the likes of infrastructure, hedge funds, currency, commodities, credit, and emerging market debt and equity.

But Brown’s paper says that any benefits accrued by specialist managers in these newer asset classes are being eroded through inflexible asset allocation and higher costs.

Brown adds that this is the result of the industry looking at the challenge of managing assets the wrong way round. Instead, investors should be looking at risk appetite in terms of risk premia and wealth. Where risk premia and wealth are high, then there are more investment choices. Where risk premia are high and wealth is low, then funds’ responses will be different.

It is this type of different thinking that Brown says investment committee’s need to start recognising to generate better outcomes for their clients.

To read the full report click here: Dynamic Asset Allocation and Fund Governance

For further papers published by the 300 Club click here: http://www.the300club.org/WhitePapers.aspx

Members of the 300 Club include: 
Saker Nusseibeh    Hermes Fund Managers (Chairman of the 300 Club)
Zuhair MohammedAon Hewitt
Prof. Amin Rajan   Create Research
Lars DijkstraKempen Capital Management
Bob MaynardPublic Employee Retirement System of Idaho
Adriaan RyderQIC
Robert TalbutRoyal London Asset Management
Alan BrownSchroders
Dylan GriceSociété Générale
Yves ChoueifatyTOBAM


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