Fund managers Deutsche Asset Management is working to persuade charity clients to adopt a new way of changing the balance of assets within their portfolios as part of a move designed to improve performance and lower costs.
In a first for the charity investment market, the company is launching two funds which require clients to deposit around 3 per cent of their assets. All movement between equities and bonds or country asset allocation changes take place within the funds, leaving the other 97 per cent of the portfolio undisturbed.
The funds use equity and bond futures contracts. Charities have been permitted to buy derivatives or futures "in support of the investment process
since March when the Charity Commission updated the Trustee Act.
Asset allocation has traditionally involved buying and selling across the entire portfolio, which according to Adam Seitchik, Deutsche's chief global strategist, involves high transaction costs and can take as long as one or two weeks. The asset allocation funds are more "nimble", said Seitchik.
"All clients invested in the funds get immediate exposure to our investment insights, without time lags. Unlike traditional asset allocation, we are able to cheaply exit investments that are not working and easily take profit when something goes in our favour,
Seitchik said that the funds should provide improved performance for charity clients. Deutsche began running the funds in August last year using its own seed capital and has achieved an annualised return of 8.4 per cent, compared with a benchmark return of 4.8 per cent (the Balanced Asset Allocation Fund uses a bond benchmark since assets for the fund come from the bond portion of the portfolio).
Transaction costs are also lower using the asset allocation funds, according to Seitchik. "The commission cost of buying and selling £1 million of the FTSE 100 stocks in the traditional cash markets is £7,000. Using FTSE 100 futures, the cost drops to only £200. This saving goes straight to the bottom line of the client's fund performance."
Deutsche has approached a number of charity clients in the past two months to see if they want to convert to the new strategy and hopes to sign some up in the next quarter. Charities would allocate a sufficient amount to the fund to achieve the same risk/return profile from asset allocation as in a traditional implementation. This suggests an allocation of around 3 per cent.