Alternative investments, the darling of the super fund landscape for the past several years, have recently come under fire for everything from lack of liquidity to questions over their correlation to ‘traditionals’. Notwithstanding their track record of strong lowly correlated returns, befitting the new style of asset allocation involving alpha/beta separation, questions are being raised about what happens in a crisis, such as a run on a fund. MICHAEL BAILEY, GREG BRIGHT and SIMON MUMME asked a cross-section of asset allocators for their definition of ‘alternatives’, and their thoughts on how much a super fund should ideally have.
What are alternative assets and how many of them should a super fund have in its portfolio? It’s an argument complicated by the fact that many asset allocators disagree with the need to define ‘alternatives’ at all. “Alternatives is a stupid term,” one head of investments for an insurance fund says. “We have a variety of different assets and we look at the fund as a whole. Australian funds have too many buckets.”
The chief investment officer of NSW State Super, Martin Drew, is more diplomatic but gives himself plenty of latitude with his approach to the ‘a-word’: “Alternatives is a broad term with no strict definition. I view alternatives as anything that isn’t equities, bonds, property or cash. So that leaves infrastructure, private equity, hedge funds, et cetera.” The founder of Sovereign Investment Research, Ray King, says that regardless of the semiotics, viewing ‘alternatives’ as an asset class in itself – no matter how broadly defined – can harm returns. “A common market practice is to broadly group alternative investments,” he says.
“Sovereign’s view is this diminishes the scope to exploit investments with very distinct properties – we believe asset allocation analysis of these investments must be relatively disaggregated and study specific characteristics.” That’s not a view completely shared by an asset consultancy which has become synonymous with ‘alternative’ investments by Australian super funds, Access Capital Advisers.
While Access certainly assess each sub-asset class on its individual merits – how else could it not recommend any hedge funds to clients – director David Chessell finds it helpful to step back and view the investment landscape in black-and-white, or in his case traditional and alternative. “When we run strategic asset allocation modelling, we run it in terms of the main listed asset classes, what we call the market portfolio, and for alternatives as a single asset which we call the target return portfolio,” he says. “We have to make the same assumptions about expected return, standard deviations and correlation as we do for listed asset classes. Why we lump unlisted assets together is because we think we have a better handle on assumptions than if we looked at them separately.”