A growing number of superannuation funds are shifting from traditional hedge funds to more liquid risk premia, alternative beta and multi-asset strategies as many absolute return–style managers have not met their requests for lower fees, more transparency and greater liquidity.
Cambridge Associates head of Australia and New Zealand Travis Schoenleber says that with banks no longer lending the way they used to, super funds are exploring private credit, including direct lending and opportunities offshore.
Schoenleber advises super funds on their absolute returns strategies.
He says private credit is becoming a more attractive alternative because of its better outcomes, lower fees, higher transparency and limited default risk compared with more traditional hedge fund offerings. “Private credit can provide a nice coupon of 300 to 400 basis points above cash, plus an additional upside ticker,” he says.
However, because the big end of town struggles to get sufficient scale in private credit, the pendulum is swinging back to small and medium-sized funds, he notes.
Idiosyncratic positions
Robert Graham-Smith, a senior investment analyst at Mine Wealth + Wellbeing, expects to get better returns and diversification benefits from investing more of the industry fund’s $10 billion in assets in liquid alternatives. The fund is interested in multi-asset managers with a greater focus on idiosyncratic positions, as opposed to classic allocators.
These are expected to compete more effectively with hedge funds for capital because of a more attractive liquidity profile and lower fees. Graham-Smith is currently looking at managers that invest in a range of products across various markets with the potential for attractive CPI-plus return profiles over the medium term.
Part of the balancing act, he adds, is determining how a portfolio manager is likely to handle distressed market conditions, and working out the role of a multi-asset fund strategy in a portfolio.
The Mine Wealth + Wellbeing investment team views any potential allocation as a competition for capital across the liquid absolute return part of the portfolio – in effect weighing up the diversification, return and risk characteristics for fees charged by hedge funds, other multi-asset products and alternative risk premia offers.
He cites long “core” European government bonds (Germany, Netherlands, Finland) versus short “peripheral” European government bonds (Italy, Spain, Portugal, Greece) as an example of a potential trade at the more idiosyncratic end of the spectrum.
While this investment could be executed via any number of instruments and time frames, he says this is just one example of a holding that some multi-asset funds, global macro hedge funds and global bond managers all could potentially own.
“Our focus is more on seizing opportunities as they surface based on their merits,” he says. “It all comes down to what they can deliver from a portfolio construction perspective, relative to the overall fund and other potential investments.”
Retaining control
Like Graham-Smith, Bruce Tomlinson, portfolio manager for hedge funds and alternative strategies at Sunsuper, also claims there’s no substitute for actively researching global market opportunities. He credits retaining control of strategy and manager selection for much of the fund’s 30 per cent reduction in fees for alternative investments over the past five years, and a 12.3 per cent net return in the 12 months to June 30 for the Sunsuper Balanced Option.
“I’m a strong believer in the direct approach, and working assets hard through active management,” says Tomlinson. “This approach has seen us make 25-plus new investments in the last year, including nine co-investments, and over 15 fund allocations, commitments or redemptions.”
With about 5 per cent of its $45 billion in funds under management invested in hedge funds and alternative strategies, Sunsuper now has the resources to do the global research itself, he says. This means it’s less reliant on the more limited world view of domestic consultants.
“Rather than waiting for opportunities to be marketed to you here in Australia, you need to get a lot closer to managers overseas,” says Tomlinson. “By maintaining relationships with credit managers, in areas such as direct lending, distressed, reinsurance, and asset-backed, we’re better positioned to capitalise on future opportunities.”
What’s mirrored Tomlinson’s decision to ramp up the direct approach over the past five years is a greater interest in co-investments and managers with high-conviction, idiosyncratic positions that are willing to take additional capital from Sunsuper on more favourable terms.
He’s also moving away from more liquid hedge funds and developing a specialist credit program that offers better opportunities and better alignment, such as lower fees.
“There are also opportunities in developed markets to earn good returns in bank replacement credit strategies,” Tomlinson says. “These include asset-backed lending in real estate and infrastructure, among other areas.”
Tailored solutions
AMP Capital’s head of alpha strategies, Dr Alistair Rew, says that while identifying true alpha clearly remains essential, it’s important not to underestimate the value of client engagement, tailored solutions or the heightened role of data and technology in helping to deliver these things.
From a cost perspective, Rew sees the “commoditisation of alpha” as a great outcome that frees up the budget to track down more active management opportunities. However, he says that when it comes to achieving solid returns and managing risks, it’s equally important to combine greater computing power, speed and storage capacity with the skill sets of investment teams.
“With technology having levelled the playing field, over shorter-term investment horizons funds will need to find alternative ways to generate alpha, which is becoming more demanding,” Rew says.
The trick, adds Rew, is for super funds to reintegrate four key building blocks – stock selection, risk management, portfolio management, and technology and data – to create unconstrained, benchmark-unaware strategies that help meet a wider range of client needs.
“Better analysis of richer datasets will enable funds to reach more tailored client outcomes, whether it’s around greater process transparency, absolute capital growth, reduced volatility and downside protection, social investing or whatever is important to the client.”
Much of this new thinking is reflected in the AMP Capital Global Equity Fund, launched this year, which targets double-digit annualised absolute returns across a market cycle. “We’ve taken a high-conviction approach, investing in a small number of exceptional companies with outstanding prospects that have dependable and persistent cash-backed returns on capital,” Rew says.
Unproven strategy
While it’s encouraging to see institutional investors deploying more multiasset, alternative beta and risk premia strategies, Schoenleber cautions that these strategies didn’t exist during the global financial crisis, and as such remain largely unproven.
Similarly, with global credit spreads having come down considerably, he says private credit strategies may be at risk during a liquidity crisis or in a significant global downturn. “With returns from active management better over the past six to 12 months than they’ve been over the past three to five years, there’s clearly less reliance on central bank policy to add value.”
Samuel Mann, a partner with Longreach Alternatives, echoes these concerns. He says some super fund managers are trading liquidity risk for uncomfortable levels of leverage. “I’m a little worried about [leverage] apathy, especially when it comes to risk premia or alternative beta,” he says. “Given the difficulty allocating capital, it’s clearly tough being on an investment committee right now.”
The experts quoted in this article were interviewed ahead of speaking at the 2017 Investment Magazine Absolute Returns Conference in Sydney on September 14.
