Austrian asset manager Spängler IQAM Invest believes the application of a scientific approach is the secret to its success and growth in the country's institutional market for balanced funds and bond portfolios.
As well as Zechner and Steinberger, Engelbert Dockner, professor at the Institute for Finance and Corporate Strategy at WU Wien, and Thomas Dangl, professor at the Institute of Management Science at the Vienna University of Technology, are the founding partners and today constitute the research board.
In 2010, IQAM was brought together with the Spängler investment company. The members of the research board now own a quarter of Spängler IQAM Invest.
Even as the name changed, the business did not. “An overwhelming part of the funds we manage is institutional. And we see quite a dynamic growth in the area of ‘Spezialfonds’ [non-Ucits-compliant alternative investment funds],” Steinberger says about the market niche that the company has focused on since its early days.
It was able to moderately grow assets through the crisis, even as the overall Austrian market was hit, making its market share grow by 25 per cent (see chart two).
A “major share”, as Steinberger puts it, of business and research at Spängler IQAM Invest involves multi-asset class portfolios. Thus, the main work for researchers is on strategic and tactical asset allocation – about choosing one asset class over the other.
For Zechner, this is one of the areas to create value-add for clients. “The research of asset allocation is still in its infancy. Duration risk is well understood in finance, as are risk factors behind equity markets. But dynamic asset allocation – the interplay between asset classes from stocks to bonds – is a field wide open.”
Lessons from history
The asset class decision matters most for clients, as many historical studies of performance attribution have shown. The famous study by Roger Ibbotson, professor at Yale University, revealed that asset allocation accounts for 90 per cent of return variation between balanced funds.
Even as institutions have retreated from the asset allocation approach of the 1970s, often “investing statically 60% in stocks and 40% in bonds,” as Zechner puts it, the tools of many investors are still too eclectic. “We want to achieve further progress in this area and offer our expertise to clients.”
The research teams at Spängler IQAM Invest try to develop new criteria to understand the dynamics between various asset classes. Value indicators and momentum are frequently employed, but change constantly.
The results are used in a Black-Littermann model, contrasting Spängler IQAM Invest’s expected returns on asset classes with those observed in financial markets today. However, macroeconomic news and the European debt crisis trump those factors at times as policy makers try to stir the global economy to higher growth. Most recently, the European Central Bank jumpstarted a risk rally after it pumped €1,018bn into banks.
“Many asset managers were surprised by the extent of the recent rally,” says Steinberger. The momentum and power behind the recent equity rally, that had the DAX gain 45% in the six months from September 2011 to March 2012, signals that “many investors were invested in extreme positions, with lots of cash, real estate and gold”.
Over the medium term, he expects a harsh environment for bond markets. He regards safe government bonds as overvalued and shifted a lot of portfolios to hold more corporate bonds to add yield.
“We have entered the phase of financial repression,” he says. Economic growth will not be sufficient to reduce the debt burden on developed countries, according to both Zechner and Steinberger. Rather, negative real yields on debt securities, as witnessed after the Second World War (see chart one) through intervention of authorities such as the central banks, will get the job done.
“But financial repression does not mean that risky assets perform badly,” Steinberger adds. On the contrary, as debt instruments become less and less attractive due to a collapse in yield – ten-year bunds currently return 1.8% annually – equities should gain. “Financial repression forces investors into other asset classes,” Zechner says.