Nagel: Investors often engage in complex multi asset strategic asset allocation, but this complexity is not only meaningless, but also counterproductive.
The author of this article has served as a global asset allocation manager for any fund management company For a long time, the return rate of stocks has been unbelievably higher than that of government bonds, to the point where this phenomenon has a name: the mystery of stock premiums. However, few investors are willing to bet all their chips on stocks. Usually, they or regulatory agencies do not like extreme fluctuations in stock valuations or lack confidence in the sustainability of historical market trends. In addition, believing that the long-term trend of the market may be favorable is not much comfort for investors with short-term cash needs. For this reason, investors establish a multi asset strategic asset allocation, which is sometimes referred to as a policy benchmark strategy. This is the biggest investment decision an investor needs to make. Before purchasing securities or appointing investment managers, every investor - whether choosing retail investment funds or building sovereign wealth funds - makes implicit judgments about their liquidity needs, tolerance for return volatility, and potential long-term returns. This matter is of great importance. Research shows that on average, they100%The total return and approximately90%The volatility of returns can be attributed to their choice of policy benchmark strategies. The results of these judgments are often complex. JPMorgan Chase(JPMorgan)Senior asset allocation expert Jane Lois(Jan Loeys)In a recent client report, it was stated that this complexity is not only meaningless, but also counterproductive. The reason why it is meaningless is that investors only need two types of assets: global stock assets and local bond assets, the relative quantity of which depends on the investor's ability to withstand short-term declines and their demand for returns. The reason why the above complexity backfires is that focusing only on two types of assets can bring clarity and simplicity, making it easier for investors to assess the risks of these assets, and they are also much cheaper in terms of management and trading costs as well as governance time. But academic journals are filled with empirical research that identifies assets with excellent long-term risk adjusted returns, such as value stocks and companies with high stock repurchase rates. Is it definitely wise to allocate these high-quality assets? Lois doesn't think so. The structurally superior risk adjusted return is a historical product and has now disappeared. A large number of these financial literature are so well-known that their uniqueness has been arbitraged out. This means that complexity benefits the financial services industry more than it benefits investors. With simpler settings, the number of people needed in the industry will decrease, and the compensation paid to them can also be reduced. If 'everyone knows everything', why does complexity persist? There are both reasonable and bad reasons. The bad reasons include incorrect delegation and agency incentive mechanisms, poor advice, overconfidence in one's own skills and insights, and flattery and traps brought to buyers by paying large fees to financial service companies. But perhaps the most expensive reason is the fear of missing out. Although it is easy to understand this mentality, the impact of herding investors into the boom (which may later be characterized as a foam) will damage both economic growth and investment performance. But there are also reasonable reasons. Firstly, outside of the United States and the eurozone, actual market constraints abound. When even UK investors find it difficult to obtain diversified local bond exposure, the challenges faced by investors who invest in currencies of underdeveloped fixed income markets render the suggestion of holding broad local fixed income exposure meaningless. Secondly, some investors do indeed have the ability, although it is difficult to distinguish it from pure luck even after the fact. So far, Ivy League university endowments have achieved great success in allocating large amounts of private market assets. Thirdly, if the advantage of structurally superior assets has been arbitraged off, it is because a large amount of funds have adopted policy benchmark strategies that now appear too complex. Investors who adopt these strategies enjoy these returns while there are still high-risk adjusted returns. However, if funds shift towards simple strategies, the abnormal returns brought by complexity may reappear, making complexity valuable again. The most important decision made by investors is based on estimates of long-term asset market returns that are quite unstable. In a world where investors bet hundreds of billions of dollars and eliminate even minor pricing anomalies, this feels somewhat uncoordinated. But in the absence of more comprehensive information, we must utilize the existing information. Lois' call for simplification follows the example of successful long-term investors - from Bob Maynard, a veteran of public pension funds in the United States(Bob Maynard)To the legendary Warren Buffett(Warren Buffett)——The fine tradition. For the vast majority of investors, simplification will be the best strategy. (Author: Global Head of Asset Allocation, Former Fund Management Company) Toby Nagel |
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