How Supernanny can help you capture some of the most reliable and easiest sources of return

September 17, 2015 Categories: Implementation


Being a parent of two small boys, I am hooked on re-runs of ‘Supernanny.’Why?

It’s not because if I follow everything that Supernanny says from start to finish I will achieve ‘enlightenment’ and my problems will go away. I wish it was that simple. I already follow many of the steps, but I am unable – or truthfully, unwilling – to follow all the steps. Also, even if I did follow all the steps, this is never the end; there are always new challenges that I need to overcome.

Don’t get me wrong, there is nothing seriously wrong with my kids. I think my wife and I have done a good job in bringing up our children, and people always comment on how well behaved they are. But the reason that I am addicted to the show is that maybe there are small, implementable changes that I can make that will make my life easier. Sometimes, it’s because the environment is more challenging (my second son has hit the ‘terrible twos’ and the first one was an angel in comparison), other times it’s because my pain-points have changed (with two children I am more tired, so I wish they would go to bed earlier).

The same can be said about investments. Are there any changes that we can make to make life easier?

In my latest paper, “Enhance your returns through effective implementation”, I list seven scenarios that you may face:

  1. A sudden event leaves you needing to replace a manager but you do not yet have a replacement manager available
  2. You have decided to change your strategic asset allocation but have not decided on the underlying manager appointments yet
  3. You hold some cash but do not have cash in the benchmark
  4. Your scheme’s asset allocation is drifting from its SAA due to market movements
  5. You are not sure if you are getting best execution on your trades
  6. Following headlines of inappropriate FX charging practices you want to be assured that you are achieving best execution on your FX too
  7. You believe that capital markets will provide positive returns, but are worried that they are about to fall sharply

For each, I outline how a greater focus on implementation has enabled our clients reduce unnecessary costs and unrewarded risks, helping them to capture some of the most reliable and easiest sources of investment return. Examples of how our clients have dealt with some of these issues include:

  • Using derivatives to gain exposures to their desired asset allocations immediately, then unwinding these positions when the physical assets are moved between managers. This approach reduces scheme-level risk immediately, provides clients with the flexibility to maintain their desired exposure while accommodating changes (such as manager downgrades) and is cost-effective. This case study provides more detail.
  • Employing derivatives to gain exposure to capital markets, such as equities or bonds, have helped our clients boost their long-term performance. For example, one of our clients generated £8.41 million over 2014 by adopting such a strategy. Of course, the client understands that in some market conditions the programme will make a loss – as they experienced over 2013 – but she believes that over the long term, this solution will add value. This case study provides more detail.
  • Rebalancing their portfolios back to their Strategic Asset Allocation (SAA) using derivatives. Employing derivatives enables them to implement the changes in exposure more swiftly and cheaply compared to using physical assets, and enables them to track their SAA more closely. Using such a service, in 2014 the trustees of a £1 billion client reduced the tracking error relative to their SAA by roughly 70% and saved £600K2 by using derivatives rather than trading physicals. This case study provides more detail.

Like the TV show Supernanny, this paper is not meant to be a holistic guide to answer all your problems. Some of the ideas may not be new (we started using the ‘naughty step’ well before Supernanny). But I hope that by sharing our experiences gained from having managed multi-asset portfolios for over 35 years, we may help spark some ideas that will help you do something differently (however small) and enhance what you do.

1This is approximately equivalent to €11.7m and US$12.8m using exchange rates as at 31 May 2015.
2This is approximately equivalent to €835K and US$916K using exchange rates as at 31 May 2015.

Shashank Kothare, Director, Investment Communications


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