Delivering Alpha by Hilda Ochoa-Brillembourg

Author:Hilda Ochoa-Brillembourg
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2019-01-21T16:00:00+00:00

The Art of the Tilt

All asset classes offer opportunities to tilt the policy’s allocation to an asset class in the direction of securities that appear to be offering a higher return per unit of risk. Tactical tilts respond to value-added opportunities over a 12- to 36-month period. Structural tilts respond to pricing inefficiencies that may last longer than your policy portfolio review horizon (say, more than 36 months). Structural tilts may be incorporated into the weights of the policy portfolio. Most of the time these apparent deviations from fair value are relatively small, say within one standard deviation from the historical average ratio of price to fair value. Price disparities that fall within one standard deviation of historic averages may be exploitable by external active trader-managers, and you trust they will be exploiting them.

For institutional investors seeking to add value over and above the underlying managers’ security selection and trading skills by emphasizing some styles over others, additional style tilts are warranted, in my experience, only when price disparities are exceeding 1.5 standard deviations from historic means. To identify those tactical tilt opportunities, track the valuations regularly. Like a bird searching for its prey, we have tracked all investment styles, more than 50 of them, around world capital markets. Investors should review their value dispersions from historic averages at least quarterly, searching for 10 or more opportunities for tilts, 2 to 3 in each asset class. The tilts should be small (10 to 20 basis points of total portfolio risk) because these opportunities appear infrequently and can take as long as three years to pay off. Therefore you have to make sure they are well diversified across asset classes and investment styles to avoid timing and random risks.

Examples of these portfolio tilts within and across asset classes have appeared and may continue to appear over time between the styles and market segments shown in Figure 13.2. New styles and market segments are likely to offer additional opportunities in the future.

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