Posted on February 25th, 2011 in Industry News
A man walks into a bar and orders a Martini and, before the barman can ask him which one he would like, he promptly walks away to a table. The barman proceeds to prepare his favourite Martini, hoping that it is the one he would want. However, upon tasting the drink, the man exclaims “This is not what I wanted!”. When the barman asks the man which Martini he would like instead, the man, looking confounded, replies “Is there more than one type?”
Today, retirement funds face a similar dilemma with regards to aggressive and moderate balanced funds. Traditionally, it has been argued that aggressive and moderate balanced funds operated in separate spaces. Moderate balanced funds generally held less of the riskier assets such as equities and property. At the same time, moderate balanced funds generally held less concentrated equity portfolios.
However, the performance of the average aggressive balanced fund and the average moderate balanced fund have mirrored one another quite closely over the 16 year period from 1 January 1995 to 31 December 2010:
Traditionally, the average aggressive fund would be expected to significantly outperform the average moderate fund over a long term period. However, the above graph seems to indicate that there has been little difference historically between the average moderate and aggressive balanced funds. Are the Martinis really different?
Delving deeper, the average asset allocations of aggressive and moderate funds seem to indicate a similar picture, as described in the table below:
| Dec 2010 Data | Average Moderate Fund |
Average Aggressive Fund |
Difference |
| Total Equity | 67.0% | 70.5% | -3.5% |
| Total Bonds | 14.4% | 14.2% | 0.2% |
| Total Cash | 13.5% | 12.0% | 1.5% |
| Total Property | 3.4% | 2.2% | 1.2% |
| Total Other | 1.7% | 1.1% | 0.6% |
| Top 10 Holdings as % of Total Equity | 53.0% | 52.5% | 0.5% |
The data in the table above are reflective of December 2010 and are received directly from the asset managers as part of the Jacques Malan Consultants and Actuaries Market Value Survey. The analysis is performed on the global balanced mandates of the managers and thus the above includes foreign as well as domestic investments. While this information is captured at a single point in time, it does provide an indication of the expected differences between aggressive and moderate funds.
It would seem that there is not a large difference between the average aggressive balanced fund and average moderate balanced fund, both on a performance and underlying asset allocation basis. If this is the case, then how should retirement funds go about deciding which product to invest in? Which Martini should they order?
Shaken or stirred – How to pick the right Martini?
The similarity between aggressive and moderate balanced funds on average does not mean that the various asset manager products and views aren’t significantly different.
The graph below shows the average aggressive and moderate fund as well as the best and worst performing aggressive and moderate funds.
Again there appears to be no significant difference between aggressive and moderate funds. It is also interesting to note that the best and worst performing aggressive and moderate funds are all from different asset managers. There is, however, a large difference between different asset managers, and in particular their products.
Expanding on this idea that the investment approach of the particular asset manager’s products has more influence on performance than the risk profile, the table below shows the range of asset allocations between all the products available including both moderate and aggressive funds. The analysis is based on the same data as used before:
| Dec 2010 Data | Maximum Exposure | Minimum Exposure | Difference |
| Total Equity | 75.0% | 33.4% | 41.6% |
| Total Bonds | 28.5% | 0.0% | 28.5% |
| Total Cash | 54.7% | 1.7% | 53.0% |
| Total Property | 10.7% | 0.0% | 10.7% |
| Total Other | 12.7% | 0.0% | 12.7% |
| Top 10 Holdings as % of Total Equity | 66.5% | 34.2% | 32.3% |
Thus the differences between asset managers’ products can be substantial – some are vodka Martinis while others use gin. This result makes intuitive sense as each asset manager has different views as a result of varying investment philosophies. In other words, each asset manager believes their recipe for a Martini will taste the best!
The evidence suggests that, instead of taking the traditional route of aggressive versus moderate, it is more important to identify which particular product suits the fund’s requirements best.
A vodka Martini, with two olives, shaken not stirred
We suggest that investors discard the traditional risk profile method of choosing a fund when considering the traditional moderate and aggressive space, but instead consider more detailed criteria under which the universe of balanced funds should be evaluated. Do I prefer vodka or gin? Olives or no olives? Who mixes the kinds of drinks I enjoy?
Practically, this will mean that the investor will need to take greater ownership in identifying the risks they face, rather than basing their decision on the risk categorisation as provided by asset managers. It is not for the barman to decide which Martini is best for you as he will have his own opinion on which Martini tastes best! In the same way, each asset manager will have their own views on risk, which will not always agree with what the investor requires.
It is thus extremely important to understand both an asset manager’s philosophy as well as how a specific fund works in order to identify if it will meet your needs. Otherwise, you could end up as disappointed as the man who ordered the wrong Martini.
Source: JMCA Survey
Paul Wilson
Investment Consultant and Team Manager: Asset Manager Research
