A (Brief) Introduction to Global Asset Allocation (GAA) Strategies
Thinking Outside the Style Box(es)
Long-term strategic asset allocators, by using only simple, calendar-driven rebalancing methods, may be missing out on opportunities to enhance risk-adjusted returns in a manner that is complementary to strategic plans. Enter global asset allocation (GAA) strategies, whose value proposition when used in a benchmark-relative capacity involves keeping pace or mildly outperforming static benchmarks on the upside while limiting participation in down markets, and absolute-return (i.e., benchmark-free) GAA strategies, which play the role of inexpensive, liquid portfolio diversifiers.
To date, however, two significant hurdles to widespread GAA strategy adoption have been the disjointed prescription on how to incorporate these approaches strategically within an asset allocation framework and the lack of a clear market definition of GAA.
For most investors, the portfolio construction process begins with the formulation of capital markets assumptions from which a strategic asset allocation (SAA) is derived. Assessing how equity allocations fit within SAA is as simple as classifying equity investments along well-defined dimensions such as market capitalization, region, and/or style, while within fixed income, the dimensions might be duration and credit quality, perhaps with some regional breakdown. Even within alternatives, a generalized term with differing interpretations, real assets are often readily identifiable and hedge funds can be labeled through a number of industry classification schemes. Less easily defined, however, are those approaches within alternatives that move across asset classes, in a burgeoning category of investments known as Multi-Asset Class (MAC) strategies.
It is within this MAC umbrella, a catch-all for the unclassifiable, that GAA strategies reside, alongside their more commonly known MAC counterparts such as global macro hedge funds and risk parity strategies. Because MAC strategies span multiple “boxes,” an allusion to the popular Morningstar classification scheme, investors tend to have difficulty thoughtfully incorporating these approaches within a strategic asset allocation framework. Adding to the confusion, the GAA universe itself is ill-defined within the MAC space.
Revisiting Characteristics of Global Asset Allocation Strategies
The GAA moniker can be loosely applied to any strategy that makes top-down allocations in an attempt to capture short-term opportunities that exist across asset classes (hence the “AA” in GAA). While a traditional asset allocation relies on static exposure to systematic market factors to generate returns, GAA investors believe that asset classes may deviate from their long-run equilibrium values for a variety of reasons. Capitalizing on these deviations creates opportunities for return-enhancement above and beyond passive exposure to various risk premia.
Although not exclusively systematic in nature, most GAA strategies aim for quantitative rigor in lieu of qualitative methods, incorporating macroeconomic, fundamental, or technical indicators in repeatable, data-driven approaches. Typically systematic rather than discretionary, GAA strategies are largely unconcerned with security selection but may make intra-asset decisions at the regional, style, or sector level. Most GAA managers would challenge the assertion that they engage in market timing, as many strategies involve making relative calls such that the portfolio remains fully invested in assets other than cash even during periods of negative expected returns. When used in a relative capacity, GAA’s long bias with directional market exposure and positive beta to conventional portfolios contrasts with other, absolute-return MAC strategies; lack of benchmark sensitivity results in portfolios with upside/downside characteristics more closely resembling those of traditional alternatives meant to act as portfolio diversifiers.
The “G” in GAA denotes global asset class coverage, and the GAA opportunity set typically includes stocks, bonds, currencies, and commodities. This opportunity set may be constrained by the liquidity of the underlying securities or by the liquidity of derivatives linked to those securities such as futures contracts (to be more cost-effective, trades are commonly made using derivatives). Since a typical manager will simultaneously allocate capital across dozens of global markets, the GAA space tends to be comprised of larger firms. However, as we will touch on later in a piece entitled “The GAA Search,” this is not always the case.
GAA Classification: Marketplace Inconsistency
As mentioned above, GAA strategies tend to be grouped with other MAC strategies within the alternatives portion of the portfolio. While some investors may classify global macro strategies as GAA, most break out separately, as does Balentine.
Because MAC strategies have increasingly begun making use of tactical overlays, popular manager databases have difficulty properly classifying GAA products. Adding to the confusion are the varying degrees of equity or fixed income exposure that GAA strategies retain at any point in time, which are a function of whether the strategy is pegged to some common benchmark, (i.e., 60% global equities and 40% bonds) or is run in a benchmark-free capacity.
The fact remains that a good deal of heterogeneity exists within the GAA universe, and investors must take care to ensure that proper “apples-to-apples” comparisons are made during GAA due diligence. However, if investors can overcome the difficulties that traditional manager databases and the market have cohesively grouping these funds for comparison, they will be able tap into the potential value-added from the nimble band of strategies referred to as “GAA” within the MAC sub-genre of alternative investments.
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