Investment in small caps has paid off for Industry Funds Management (IFM), reporting outperformance of about 14 per cent in its first year. Chief executive of IFM, Brett Himbury, said its team of four, poached from Macquarie more than 12 months ago, has addressed a gap in small-caps management.
“We actually spoke to our clients, who pretty much said to us that they were interested in the long term in small caps, but found it difficult at the time to get exposure to good quality managers,” he said, saying a lot of small-cap managers were at capacity.
Meanwhile, in an environment where Australian super funds and global pension funds are searching for yield, Himbury said infrastructure debt has also proven to be an attractive asset class, as it provides a reasonable yield over composite bonds.
“Often the counterparty is a government counterparty as well because you’ve got an availability charge, so your counterparty risk is more often than not the government, but you’re getting a yield over a government bond of 200 to 300 basis points,” he said.
IFM’s largest asset class is listed equities at $15 billion, while it invests $14 billion in infrastructure and $13 billion in debt (commercial and infrastructure).
For listed equities, IFM has an enhanced passive vehicle, which Himbury said is good value.
“It’s about a 50-basis point tracking error, really low cost and just meant to give the index plus 20 to 30 points per annum. And that’s what it’s done for the last 10 years. And we do that for sub-10 basis points.”
However, of its three investment approaches, Himbury said its active equities capability, which is a highly concentrated portfolio of about 17 stocks, has been a strategy that hasn’t worked well.
“We really just back our judgment on companies that we think can reinvest their cash to get optimum long-term returns. That hasn’t gone that well, to be honest, because in this environment, yield’s been rewarded and reinvestment hasn’t been.
“But looking forward, I think the yield stocks have been bid up, so we’re hanging in there with that strategy and think it’ll be rewarded over the long term.”