Why Investors Are Pulling money from GTAA Funds
Lack of uniformity in GTAA strategies may be troubling investors, according to researcher Markov Processes International.
Investors have been putting Global Tactical Asset Allocation strategies on the firing line because of disappointing performance, but it may be fund managers’ lack of uniformity that’s troubling them.
According to eVestment, investors pulled $18 billion from the category in the first three quarters of 2016. The trend has continued this year, with the $13.2 billion Orange County Employees Retirement System pulling the plug on its $791 million GTAA allocation just last month.
Funds that use GTAA strategies are broadly diversified, with managers often switching between asset classes globally and using a variety of techniques such as derivatives and futures contracts. The problem may be that the strategies have too little in common, leaving investors confused and with more room to be disappointed by results when comparing performance, according to research produced for Institutional Investor by investment research firm Markov Processes International.
“Given the disparity in products that can reasonably fall under the GTAA umbrella, it may be particularly difficult for investors to understand what they’re getting in any given product and how--or whether--it fits with their overall portfolio objectives,” says Megan Woods, the Markov analyst who conducted the study.
Markov Processes International, or MPI, analyzed 10 of the most widely used GTAA funds between October 2012 and December 2016 and found low correlations between them. Nine were mutual funds, including BlackRock Global Allocation, GMO Benchmark Free Allocation III, Ivy Asset Strategy, J.P. Morgan Global Allocation, PIMCO All Asset All Authority fund and PIMCO All Asset fund, Invesco Macro Allocation, John Hancock Global Absolute Return fund and William Blair Macro Allocation. Bridgewater Pure Alpha was the sole hedge fund in the group.
Many investors allocate money to GTAA to mitigate volatility in their portfolios. The Hancock fund, sub-advised by Standard Life Investments, was far less volatile than others in the group analyzed by MPI, while the Ivy Asset fund fluctuated much more than the rest. The two funds also represented extremes when it came to measuring the largest cumulative loss across consecutive months in the 10 years through 2016. The John Hancock fund lost a maximum 6.3 percent by that measure; Ivy lost 21.3 percent.
As part of its research, MPI dug into the sectors the funds selected for investment. Again, they differed significantly. For example, net fixed income exposures ranged from less than 10 percent in some cases to almost the entire portfolio. And when it came to annualized performance, they ran from the top quartile of their peer group to the bottom, though a benchmark portfolio of 60 percent U.S. equities and 40 percent U.S. bonds beat all 10 funds from October 2012 to December 2016.
For those funds with long enough track records, MPI analyzed their performance from January 2007 to the end of December 2016, this time capturing their results during the 2008 financial crisis. All of the mutual funds that used GTAA strategies lost less than a global 60/40 portfolio, testament to their stated objectives of providing less volatility than the overall market. And as has been well publicized over the years, Bridgewater’s Pure Alpha produced a positive return between November 2007 and February 2009.
Though many investors claim to want GTAA funds because they offer diversification and lower volatility, they haven’t always stayed long enough to benefit from these characteristics. MPI’s analysis shows that many GTAA funds can soften the blows of a market downturn.