It was Billy Connolly who said there was no such thing as bad weather – just the wrong sort of clothes. The same can be said of investing: providing you avoid the spectacularly dumb punts, there’s no such thing as bad investing – just bad timing. The economic cycle changes as surely as the seasons and, global warming notwithstanding, timing the onset of the seasons is more predictable than calling the top or bottom of the economic cycle.
Although many claim they saw the global credit crunch coming, many others bought into collateralised mortgage obligations of trailer park mortgages that had been given AAA credit ratings only for these so-called securities to wither and die at the first sign of adverse economic weather. In the latter half of 2007, the economic weather changed so suddenly it caught many investors wearing sandals and Hawaiian shirts rather than stout boots and waterproofs.
The stock market crash in the first quarter of 2008 dealt a blow to the performance records of some of the UK’s top pooled pension funds, as balanced funds lost, on average, 7.9% and equity funds 9.7%. An investment strategy that can ride out such storms and generate positive returns regardless of the prevailing weather is something to consider. So, for pension funds, is there such thing as ‘all-weather investing’?
“It’s funny how new phrases crop up to describe things that already exist but people rediscover and then feel compelled to give a new label,” says Niall Quinn, business development director at Gartmore Investment Management. “At its most basic, it means assembling a portfolio of asset classes that are diversified enough to reduce risk, but varied enough to ensure you get a smooth ride through market volatility and, hopefully, generate absolute return.”
Steve Mingle, director of Isinglass Consulting, says all-weather investing is not a phrase he’s heard before. “Even when you Google it, nothing very much comes up,” he laughs. “But, when you think about it, if the expression coined becomes common currency in the pensions industry, it’s a perfect description of what many pension funds desire from the asset mix: capable of delivering a positive return regardless of which way the economic wind is blowing.”
Mingle says the name may be new, but the concept is a familiar one. “If you consider the liability-driven investment (LDI) route, it’s a pool of assets to compensate for market conditions,” he says. “The emphasis is not only on the long term but also returns that are less volatile over the short term. If I had to define it, that’s what I’d call all-weather investing.”
Even though Quinn feels all-weather investing is a new phrase to describe something that already exists and Mingle believes the phrase isn’t in widespread common usage in the pensions industry, Pioneer Alternative Investments has run its Momentum All Weather Fund for the past 13 years and the Close All Weather Fund was launched in 2003.
“The All Weather Fund is actually a fund-of-hedge funds,” says Pioneer’s David Hanratty. “It’s a successful fund, in that it’s low volatility, but with a steady return of 9% a year, regardless of how the wider market performs. But, overall, we would see the All Weather Fund as a key component in a mix of funds and assets, not as a specific panacea to all your investment woes and timing challenges.”
Developed off the back of the 2000-2003 bear market, the Jersey-based Close All Weather Fund is used as a neutral asset allocation strategy for an “international personal pension product”, a qualifying recognised overseas pension scheme approved scheme and Guernsey-based local pension plan (the fund is listed on most life companies’ platforms). “Our research concluded that investors wanted something they could put their money in where they knew a strong risk management framework was in operation, but not to the extent it would nullify any returns,” says Rex Cowley, managing director at the Close Wealth Management Group.
The fund provides diversification on three levels: multi-asset, multi-manager and multi-style. “As a multi-asset fund, the client portfolio gets exposure across all the main asset classes covering equities, property, fixed income and the alternative sector, which we define as commodity-oriented and the hedge fund sector,” says Cowley. “While these markets are cyclical, history demonstrates they’re generally uncorrelated and certain asset classes will outperform others in both the short and long term. The likelihood of all four asset classes falling simultaneously is very unlikely and this is key to managing downside risk.”
Quinn says the Gartmore approach to all-weather investing for its pension mandates is to group together multiple asset classes with low levels of correlation to each other to smooth out returns. “For example, commodities are negatively correlated with equities and bonds,” says Quinn. “The last nine months has seen equities down but commodities up, which averages out at a positive return. It’s almost an evolved version of the balanced approach, but it’s broadened out to include assets like commodities and alternative investments such as hedge funds.”
