Specialist VS Balanced strategies

[Myself]

Hi all!

I have a bit of confusion around specialist and balanced strategies.

It is first shown that a risk budgeting process should be performed to determine what the strategic benchmark is (and thus level of strategic risk) and also what the permissible level of active risk is. In terms of a specialist strategy, this process makes sense since the strategic allocations are determined and individual managers are appointed for each asset class. They also have some freedom to deviate from the strategic allocation (which gives rise to the tactical allocation) within the bounds of the active risk allowance.

However, in the case of balanced strategies, to put it simply, managers can allocate how they see fit. Does this mean that there is no risk budgeting process followed if a balanced strategy is chosen?
Or rather a risk budget process is still performed and managers are simply made aware of the limits (although they don't follow them)?

 

[Colin McKee]

I suspect there will be real variation in how different trustees deal with different balanced managers. But once the risk budgeting process is finished the trustee will have a strategic benchmark (eg 40% bonds rel FT>15 years, 40% I-L rel 15 year index, 20% equities rel to FTSE All Share). They are happy with the strategic risk relative to their liabilities. They also can cope with some active risk. The balanced manager is told that they will be measured against the strategic benchmark of indices, and also given an idea how far they can depart from this. It may be a max tracking error, or a VaR or some combination, maybe including max active money positions in each asset category. the balanced manager can then choose to deviate both from the asset allocation, and from the index allocation within each category. the total additional risk is still called active risk. So I dont think they can allocate as they see fit, but they have freedom. If they add value then they are worth their fee. I suspect if a balanced manager was too volatile against the strategic benchmark, the tracking error would be noticed and they may have breached the terms of their mandate.