Evercore Pan Asset

I have met a number of individual investors and charity trustees in recent days who spend a lot of time and energy on choosing managers and specialist funds, but who effectively undertake their own asset allocation.

Some of them seem unaware that they are making the asset allocation decisions. They have some money, so they consider a range of options, judging on a particular day the right combination of asset and manager and whether to buy into another fund. Sometimes the managers come to them, inspiring them to think again about their current portfolio. Sometimes they go to the managers, because they have cash to invest or they have time and interest to think about their fund that week.

This can be a very dear way of getting things wrong. The asset classes and funds they choose are often expensively managed. They may make a commitment when it is not a good time to add to that particular asset class because it has become too fashionable. It might have been sensible to make a bigger commitment to commodities in the second half of 2009 when  China was stockpiling and easy money was the order of the day. In January 2010 when China was reining in some of her buying and lending it looked a bit different. It may have been good to hold property unit funds in 2006, but by 2007 these were dangerously exposed to a market about to fall heavily. The funds often turned out to be very illiquid, so you couldn’t get out when you wished. Buying hedge funds to have something in the portfolio that was not going to go up and down with volatile share markets sounded good before the Crunch, but then many hedge funds disappointed and fell in 2008 when they should have detached from the general chaos.

The evidence is very strong that what matters most to successful portfolio performance is the asset allocation. There is no one right asset allocation for all seasons, and no one right answer for your particular fund. The huge changes in public policy between 2006 and 2010 have had a large impact on asset values. We have lurched from easy money to tight money to easy money to difficult monetary conditions in the space of just four years. The prices and values of the main asset classes have been very volatile. Old trading ranges have been blown apart by violent market movements. The Credit Crunch sorely tested many investors’ appetite for risk and revealed new weaknesses in risky assets. You may have taken advice and chosen a sensible asset allocation at the beginning of 2007, but that was quite inappropriate by the autumn of 2007 given the big change in banks and economies.

That’s why we think you should spend more of your investment advice budget on asset allocation than on anything else. The best way to cut your total fees is to index the investments you make in shares. The advantage of having an asset allocation adviser or manager is then you know the big decisions that matter are constantly supervised, and your attention drawn to what will actually make or lose you lots of money. Trustees have a duty of care to look after the money under their charge. They do need to show they have taken proper advice on the overall balance of the fund, and understand that that needs to be done regularly as values and markets change so rapidly.