4.1.1 The practitioners
We have talked to several practitioners in the Norwegian mutual fund industry in order to get a better understanding of industry practice, especially concerning their take on market timing.
The practitioners we have been in touch with are involved in the management of a vast majority of the assets under management in our sample. They represent both commercial- and investment banks, and combined their funds have more than 90 000 customers.
4.1.2 Multi asset-class fund customers
Through our conversations with some of the managers, it appears that multi asset-class funds are mostly a product intended for retail customers. The predetermined asset allocation is not as attractive to institutional investors; they usually work out their own asset allocation in cooperation with advisors. One manager told us that they primarily compose asset allocations for some large institutional customers, and secondarily apply this asset allocation to the multi asset-class fund.
4.1.3 The role of tactical asset allocation
The market for multi asset-class funds is growing, and market-timing activity is clearly a component of the management service. One practitioner explicitly told us that for their fund, the allocation between asset classes is dynamic, and is used actively with the purpose to increase the risk-adjusted return of the fund. Another manager told us that they do not believe they are able to outperform the market in the short run. However, they believed that the economy is cyclical, and that successful portfolio allocations determined by the business cycle should generate excess returns. The manager also said that the rebalancing of the portfolio is a risk management tool, in order to counter the change in risk in a portfolio due to it drifting away from its policy weights over time. To support tactical asset allocation decisions, the
practitioners mention considerations about the general valuation and risk levels as the key elements. In addition, macroeconomic indicators are agreeably important, and the importance of central bank decisions is emphasized.
4.1.4 Time horizon for tactical allocations
The time horizon for tactical allocation differs between the practitioners. One manager say they consider changes in the tactical weights monthly, and that these changes mean to apply for a time span of two months. Another manager says the frequency of changes to their tactical allocations might be once every two months, or even less if the market developments are consistent with their expectations, while emphasizing that they do not believe in timing the market on a weekly or monthly basis. A third manager says they make tactical allocations with expected payoffs in 6-12 months. Generally, the managers express that changing market conditions call for more frequent reconsiderations of allocations.
4.1.5 Internal performance review
The managers told us they use attribution analysis to separate between the stock selection activities and tactical asset allocation.
4.1.6 Benchmarks
The benchmark indices they use in their internal performance measurement may differ from what is publicly available. For example, there is no proper Norwegian private bonds index, which forces many managers to quote a government bond index as their reference externally, even though it might not reflect the private bond risk premiums. One manager states that they have indexes for measurement internally, but due to the complexity of these benchmarks, they do not publish them.
4.1.7 Deviation from policy weights
Regarding how much they can deviate from the policy weights, the managers have varying degrees of freedom. One manager told us that they have a minimum requirement to tracking error of the portfolio, and a maximum requirement in terms of how much they could deviate from the long-term policy weights. This individual pointed out that a manager should provide value to customers by executing high-quality active management, and still keep the allocations close enough to the policy weights so that the benchmark provides meaningful information about the product. Another manager described how they did not have specific formal requirements, but tried to keep deviations from the policy weights to under 10-15 percentage points. A third manager described how their fund might allocate 50 percent to equity if they consider the market expensive, and how this could change to around 90 percent of the portfolio if equities were more attractively priced.
4.1.8 View on multi asset-class funds as investment product
The managers shared their thoughts about multi asset-class funds as investment vehicle for Norwegian retail investors. They agreed that multi asset-class funds makes sense as a way of investing, because of the volatility protection it offers investors. Retail investors tend to behave pro-cyclical, that is buying high and selling low. Due to this unfortunate strategy, the return to a retail investor is often much lower than the average fund return. Therefore, a product with less fluctuation might be able to provide a better return simply because the investors do not sell in panic if the market plummets. A second practitioner adds, though, that Norwegian retail investors often are over-invested in the housing market and thus in theory could withstand a higher equity share.