Within the next 12 months, Cbus Super senior portfolio manager Scott Pappas expects to appoint external managers to run risk premia strategies for the superannuation fund’s portfolios to protect and strengthen its equity investment exposure.
Pappas is one of a growing number of professionals building liquid alternative strategies within Australia’s superannuation sector. He says the fund plans to target a 5 per cent allocation to Cbus’ growth equity product, and varying allocations to other member investment options, this year.
With momentum behind liquid alternatives growing, more investors are considering its place in their portfolios, Pappas says.
“We’ve had exposure to absolute returns in the past…Some have been in portfolios for a number of years as a hedge fund allocation or in fixed income but it’s increasingly bundled as liquid alts or alternative risk premia,” he adds.
An absolute return strategy typically has applied to markets that are liquid, large, deep and global, such as currency, equity indices, commodities and bond markets, Pappas says.
These strategies exploit the natural flow of funds into financial markets and are often based on factors such as value, momentum, equity market neutral, and carry (the expected return of an asset, such as a credit spread, when market circumstances stay the same).
While super funds have often used hedges and liquid alternatives, such as systematic global macro in currencies, equity, bond and rate markets, Pappas says many are now choosing a more formal structure.
“(Cbus) sees it as an extension of the investment process it has already,” Pappas says. “It’s about bringing in some diversity within the portfolio. One of the biggest risks we’re exposed to is equity market risk. The absolute return strategy will help diversify equity risk and exploit opportunities in the market.”
Cbus prefers systematic liquid alternative strategies, for their transparency and high degree of detail, which allow investors to understand how they work.
Pappas says there is nothing in timing of Cbus’s rollout that investors should read as a sign that a correction in equity markets is imminent.
“In terms of timing, we don’t think now is a time that’s better than any other (to get into absolute return strategies),” he says. “Over the long term, (the strategy) will provide protection against moves in equity markets. What we’re not trying to do is something going against equity markets. It’s a systematic strategy over the longer term of three, six, 12 months and multiple .”
Such strategies have stood other tests in the past, such as the tech bubble of the late 1990s and the global financial crisis of 2008, Pappas says.
“The managers we’re looking at typically look for strategies across markets,” he explains. “There’s not a whole lot of controversy around this sort of investment, there are just differing opinions over the detail, like when you get into the weeds, how best to implement it.’’
Pappas points to Norway’s sovereign wealth fund as the pioneer in risk premia, now used widely by asset managers throughout Europe and the US.
Risk premia specialists include QIC in Australia, K2 Advisors in the US and independent asset manager ERAAM in Europe.
Once a strategy is in place, Cbus measures its success based on parameters including return and risk-management objectives, low sensitivity equity market beta and consistency.
“It’s a highly liquid strategy to balance less allocations in portfolios (such as) property and infrastructure,” Pappas says. “We want to get too wound up in month-to-month and year-to-year, we want to really focus on the long term.”
Scott Pappas spoke toInvestment Magazine ahead of a panel discussion titled “Liquid alts: building alternative risk premia strategies”, at the Investment Magazine Absolute Returns Conference, to be held in Sydney on September 19 to 20.
