What’s the fund?
This month we are taking a closer look at the Pinebridge Global Dynamic Asset Allocation Fund. The fund is a multi-asset strategy that was originally established to manage the assets of the AIG insurance statutory fund. Statutory funds are similar to a typical pension fund in that they are required to generate consistent returns to meet the regular drawdowns that result from insurance claims. The fund targets a return of CPI + 5.00% per annum regardless of market returns and achieves this by focusing on asset allocation rather than investment selection.
The strategy is quite straightforward in that the 20-strong multi-asset team of $50bn work constantly to determine the risk and return outlook for every asset class in the world. The multi-asset team understand that economic trends in the short (within 12 months) and long-term (over 5 years) are incredibly difficult to predict. In their experience, the greatest level of certainty and actionable trends falls in the medium term, 2-3 years; as a result, they focus their analysis on building a model of economic inputs and review this quarterly. These expectations form the basis of forecast returns for all major asset classes (in the form of a Capital Markets Line) and underlying sectors of the economy. The results are plotting against each other at which point the management team allocate capital to the most attractive sectors on a risk to reward basis.
Where does it fit in your portfolio?
The Pinebridge Global Dynamic Asset Allocation Fund (GDAAF) targets a return of CPI + 5.00% over rolling three-year periods. This meets the return requirement of the Targeted Return Bucket. Importantly, the funds mandate is to deliver this whilst exposing the portfolio to two thirds the volatility of equity markets and through a highly diversified selection of assets. The fund reduces risks by investing into a series of exchange traded funds (ETFs), external and internal managed funds in order to gain its exposure to the various sectors of global markets. The strategy has outperformed its benchmark over the very long-term and most importantly been able to restrict losses during all major market events. Given the fund has a target of 2/3rds the volatility of sharemarkets, this is one of the more growth oriented Targeted Return strategies, meaning it complements well with the lower risk Smarter Money and Invesco funds.
Extensive research has shown that asset allocation drives a large portion of long-term returns and importantly, that simply maintaining the same asset allocation over time is not sufficient to deliver on the typical CPI + 4.0% objective of most investors and pension funds. In fact, research by Dalbar Inc. found that in order to generate this return over extended period and in different conditions, an investor would need to hold 100% equities at some times and 100% bonds at others. Obviously, this is extremely difficult to implement.
We are more concerned that the 30 year compression in bond rates will come to an end soon and that the historic levels of Quantitative Easing may have brought forward sharemarket returns for the next decade. We have undertaken substantial research in order to identify the asset classes that are able to protect your portfolio in what we believe will be either sustained low bond rates or a rising bond rate environment; both scenarios are not great for equity investors. We came to the conclusion that applying a more dynamic approach to asset allocation; that seeks to benefit from medium term opportunities offers the best potential to achieve this.
What does it invest in?
As detailed above, the fund invests into a combination of ETF’s and managed funds both internally managed by different parts of the Pinebridge team or those offered by external managers; the key being the team has more time to focus on value adding asset allocation decisions. The largest holdings at the current time are as follows:
- Productivity Basket: The Productivity Basket was established by Pinebridge to capture the huge increase in investment that was expected and continues to occur around the world. Their research highlighted substantial underinvestment by business and sought to build an active portfolio of exposures to this important growth sector of the global economy. The underlying allocations are as follows:
- US Small Cap Equity: Pinebridge have a generally positive view for the US economy believing that fiscal and monetary conditions facilitate a further extension of the cycle and that the current slowdown in economic data will be short-lived. The result is that their Capital Markets Line suggests US smaller companies offer greater risk adjusted returns due to the higher exposure to the true US economy and substantially cheaper valuations than the mega cap S&P 500 constituents.
- US Government Bonds: The fund has increased its exposure to US Government Bonds from 5.5% to 8.6% during the quarter as they grew more confident in the prospect of rate cuts to stimulate the economy and believe that the large amount of Government debt necessitates lower rates for longer. This has added protection for investors in periods of volatility.
- Japan Equity: Management have a long-held view of two things in Japan; 1) Abenomics will continue for the foreseeable future and eventually be successful in stimulating growth; 2) Japanese companies would become more shareholder focused. The combination has performed well for investors, with many Japanese indices now focused on the Return on Equity and cash returned to shareholders rather than on reinvestment of profits.
- Indian Equity: Pinebridge’s global network means they have in-country analysis teams in most important markets, with India a case in point. The team in India have delivered one of the best performing domestic equity funds in the world and were able to successfully foresee the implications of Modi’s run to Government and subsequent reform agenda to the benefit of investors. This offers a differentiating point and an exposure that is very difficult for investors to access.
How has it performed?
Pinebridge has successfully navigated the worst market events over the last 20 years via its conviction to its asset allocation approach. This affords management the ability to increase cash, bond and other fixed interest weightings when the Capital Markets Line suggests they offer better risk-adjusted returns. Importantly, their models suggested this was the case prior to both the Dot Com Bubble and the Global Financial Crisis, triggering a substantial move into low risk assets at just the right time.
The fund has only been available to retail investors in Australia since 2015, but the wholesale class has returned 6.94% since inception with $1.43bn under management here. This is in line with the CPI + 5% benchmark but delivered with substantially lower volatility. Shorter term performance has been weaker, due to the higher growth allocation to the Productivity Basket with a 3.07% return for the 12 months to 30 June.
What income does it provide?
As with all managed funds, the Pinebridge Global Dynamic Asset Allocation Fund must distribute all income and realised capital gains each year. Therefore, distributions are dependent on both the performance of the underlying investments and whether any investments are actually sold. As an actively managed strategy the fund receives minimal dividends and the majority of returns come in the form of capital growth and realised gains. The distributions since inception in 2015 are as follows and have averaged around 5% per annum with the intention to be paid semi-annually:
- 2014-15 – 4.93 cent per unit
- 2015-16 – .03 cents per unit
- 2016-17 – 5.84 cents per unit
- 2017-18 – 5.04 cents per unit
Importantly for investors, the fund provides daily liquidity and charges a management expense ratio of 1.00%.