(Pictured: Daniel Farley)
One of the few benefits of the global financial crisis is the way some of the big global fund managers have addressed the stark realisation that investors don’t necessarily want the type of investing they have been getting for the past 20 years. State Street Global Advisors is the latest to launch a new sophisticated strategy taking account of the changes in markets and investor demographics.
The SSgA strategy, and a fund for retail investors, focuses on lifestyle changes leading to retirement and the increasing desire for both capital protection and income throughout the person’s investing pathway. It has three compartments: portfiolio one – the builder – normally aged between 45-65 years; portfolio two – the sustainer – normally aged between 65-80 years; and portfolio three – the provider – normally aged 80 or more.
The SSgA strategy is similar in its aims to ones launched by Russell Investments in May and AXA Investment Management earlier this year. These types of funds are generally being referred to as “outcome orientated”. However, the Russell multi-manager product and the AXA single-manager product both include strong qualitative elements. SSgA’s is a quantitative strategy, which has the added benefit of low cost due to a fair amount of tilted index fund usage. SSgA has become a strong supporter of the benefits of low-volatility investing, as a return enhancer, and this is an important factor in the matrix of investments in the new strategy.
Visiting Australia for the launch last week, Dan Farley, the global CIO of SSgA’s Investor Solutions Group, said the firm had spent a lot of time trying to understand the perspective of retirees and also the various behavioural issues they faced.
“Because of return sequencing (big rises and falls, perhaps at inopportune times) people are not necessarily investing for the long term,” he said. “No-one gets the average. They get their individual experience… Building portfolios on a market-return basis gives a bit of a disconnect with what people want. They want you to not lose money. The diversification built into most portfolios is usually not enough. It’s still maybe 95 per cent correlated (with the sharemarket). Our design is to manage around all these issues.”
The strategy has a lot of moving parts, with various return-enhancing components and protective overlays. Mark Wills, SSgA’s APAC region CIO for the Investor Solutions Group, likens the complexity to that of a car: “you don’t have to know exactly how it works to drive it”.
But if some investors, especially in the retail space, were to look under the bonnet they might find the SSgA fund a bit scary. For instance, Farley says you need meaningful shifts in dynamic asset allocation to have a significant benefit. “We’re talking about moves like from less than 10 per cent in equities to 80-90 per cent,” he said.
The fund is single manager, multi-asset class, using existing SSgA capabilities, including its trend-setting low-volatility stock index strategy. Mills says: “We’re not just using one line of defence. We have multiple layers of protection. The assets are fit-for-purpose to deliver the objective. A lot of people went to cash after 2008 and are still in cash. They locked out the gains of last year and this year.”
In current market conditions, the strategy’s investments include:
- Equities – Australian managed volatility alpha, global managed volatility alpha, Australian high dividend yield, international high dividend yield and emerging markets.
- Property – listed Australian property and a global property ETF.
- Fixed income – Australian fixed income and a global high yield ETF.
- Cash – money market securities and covered cash.
- Risk/Opportunities – multi-source commodities and a diversified trading program.