The consensual view is that asset allocation is the primary driver of outperformance when it comes to building a portfolio, with some proponents of this view saying that investors may as well use a collection of tracker funds to mitigate the risk of active manager underperformance.However Evan-Cook, senior investment manager at Premier and head of the five crown-rated Premier Multi-Asset Distribution fund, disagrees.
The manager says putting together a portfolio based on asset allocation requires, to a certain degree, the ability to time the market.
It’s better to stick to good active fund managers who aren’t afraid to ignore the benchmark instead of getting bogged down in whether to under or overweight different regions or sectors, he says.
“Asset allocation is extremely difficult to get right,” Evan-Cook said.
His thoughts are similar to those of Mark Dampier, head of research at Hargreaves Lansdown, who told FE Trustnet that he would always prefer to take star manager risk instead of simply using an asset allocation model.
When asked whether investors should focus on asset allocation or star manager risk, Evan-Cook says there are two ways of answering the question.
“Ultimately, the base asset allocation of a fund will be the most important factor. If you were to hold 80 per cent equities and 20 per cent cash, clearly you are going to be better in a sell-off and worse in a rising market,” he explained.
“With that in mind, the base allocation will dictate the outcome of a fund and we don’t have a 'one fund for all scenarios' in our portfolios so, in that sense, the asset allocation is the most important thing, he added.
However, the manager says base level asset allocation should never dictate an investor’s portfolio.
“My take on that is while it is good to get right, it can be lumpy; by which I mean it can take years to come through,” he said.
“The trouble of doing asset allocation with passives is that you are waiting for that allocation to be right.”
“Say you run a 100 per cent equity fund and only use asset allocation, you probably only have six ideas – such as being overweight Japan, underweight Europe.”
“Let’s say one of those ideas works, it can be very lumpy as you can have a massive – almost career endingly – long wait for it to be right,” Evan-Cook added.
Evan-Cook says that, as a result, investors should just have broad-base, relatively evenly spilt exposure via a collection of good-quality active managers.
Unfortunately, due to the fact that the majority of passive funds of funds have only been launched recently, it is difficult to compare the performance of them against active portfolios over a longer period of time.
One of the most popular passive funds of funds is Vanguard LifeStrategy 100% Equity.
Data from FE Analytics shows that the fund has returned 28.64 per cent since its launch in June 2011. This means it has underperformed against one of its popular active fund of funds rivals, Cazenove Multi Manager Global.
At the same time, however, it has beaten the Jupiter Merlin Worldwide Growth fund.
Performance of funds since June 2011
Source: FE Analytics
Evan-Cook says that he would expect active funds of funds to beat passives in current market conditions.
“If you have active funds underneath that are chipping away, you haven’t just got six ideas. At a fund level, you have literally hundreds and thousands of ideas because you have your individual stockpickers,” Evan-Cook said.
“It’s almost like a dividend being paid because you have all these things working for you. Then, every now and again, your asset allocation will be right to give you another sweeping push.”
The manager says that one of the best examples to back up his point is his Premier Worldwide Growth fund.
Within it, he and his co-managers hold a roughly neutral 15 per cent in each of the major sectors – UK, North America, Europe, Japan, Asia Pacific and Global Emerging Markets – and then a further 10 per cent in more specialist sectors.
This means the make-up of his fund is vastly different to the likes of the MSCI AC World index, which the majority of global funds benchmark themselves against.
“We probably have even less than 15 per cent in the US and we are benchmarked against the FTSE World index, which has a 50 per cent allocation. Plus, we are probably slightly over 15 per cent in emerging markets.”
“The US has gone well and emerging markets have been terrible. You would think that it was the ugly brother that we never talked about,” he added.
While Premier Worldwide has around 30 per cent in Asia Pacific ex Japan and Global Emerging Market equities, the MSCI AC World Index has just 5 per cent exposure to the sectors.
Over the three years, the US equity market has vastly outperformed the emerging market indices.
Performance of indices over 3yrs
Source: FE Analytics
However, despite the fact that some experts would expect his asset allocation to seriously hinder his fund’s performance, it has done well relative to the index.
According to FE Analytics, it is a top quartile performer in the IMA Flexible Investment Sector.
Although the MSCI AC World index isn’t the fund’s benchmark, it has beaten it over one and three years.
It has also beaten the Vanguard LifeStrategy 100% Equities fund since Premier took over the fund in July 2012.
“That is almost entirely down to fund selection and alpha provided by the managers. If we had been doing that with passives, it would have been horrible,” Evan-Cook said.
Evan-Cook uses the Hermes Asia ex Japan and FF FAST Emerging Markets funds, among others, for his exposure to the emerging markets.
Performance of funds vs indices over 1yr
Source: FE Analytics
As the graph above shows, both the Hermes Asia ex Japan and FF FAST Emerging Markets funds have comfortably beaten and added value against their respective MSCI indices over the last 12 months.
Evan-Cook added: “Our active managers in emerging markets and Asia have had a great time of it, largely because they don’t care about the index.”
