Colonial First State CIO Jonathan Armitage

You don’t need to look hard to find examples of concentration risk at play in the equity market.

Jonathan Armitage, chief investment officer of MLC Asset Management, points to perhaps one of the most egregious examples of equity market concentration while contemplating the effect central bank and government stimulus programs around the world have had on company valuations, during a recent conversation with Investment Magazine.

Armitage, who is responsible for overseeing the management of close to $100 billion through MLC’s flagship Horizon series and MySuper diversified portfolios, points to the increase in technology consumer retailer Amazon’s market capitalisation in the last 12 months, which in dollar terms is greater than the combined market capitalisations of US Main Street and investment bank titans Wells Fargo and JP Morgan.

Jeff Bezos’s Amazon’s market capitalisation has ballooned past $1.58 trillion, up around 75 per cent over the past 12 months, an increase that is indeed greater than Wells Fargo ($US103 billion) and JP Morgan ($US311 billion) market caps combined.

Meanwhile, Apple’s market cap has ticked over $US2 billion.

Concentration risk is apparent in certain segments of market, something “history shows won’t last”, Armitage says.

It’s this concentration risk – along with a series of additional factors, Armitage explains – that has put diversification top of mind for investors.

It’s also this equity market concentration risk that has supported Armitage’s decision increase allocations to private markets over the last 12 months, something he says he will continue to do should the liquidity portfolios overall and the quality of opportunities permit.

Private skew

Private equity allocations in MLC’s Horizon 4 and 5 series and MySuper portfolios – which account for more than $34 billion of member funds – have increased on average by around 1.5 per cent across the board, Armitage says.

At the end of June this year private equity allocations in Horizon and MySuper were portfolios were 7.3 per cent and 5.7 per cent respectively.

“Private equity can give you access to different parts of the economy public markets can’t… It gives you proper diversification considering the concentration around certain stocks in equity markets doesn’t reflect the true economy,” he says.

Armitage notes decisions to increase allocations to private equity investments are not taken lightly by superannuation funds especially in light of  scrutiny on liquidity since the government’s early release scheme was launched in March.

Armitage will join specialist private equity portfolio manager, Serge Allaire, discussing the asset class and markets more broadly in the first episode of Professional Planner’s new live-streamed Investment Insights Series entitled Resilience in uncertain times: Private equity as a diversifier to be held on Wednesday August 26. Reserve your complementary digital pass here.

It’s at these times of market dislocation and disruption private equity can come into its own, Armitage notes.

“If you go back and look at that 2008/09 period, we saw companies respond quickly. It was the companies that were able to re-emerging from the dislocation in many cases performing stronger than they were before with speed and new focus structured from growth perspective to expand market share through consolidation,” Armitage says.

“It’s a great opportunity for management to go into businesses that could be run better,” he says.

“Every business we have in our portfolio, every business we are looking at we are thinking about it in that way, how it can be run better,” he says.

Dislocation & disruption

“Companies that are private are much faster to address economic challenges, rather rather than be exposed to public market challenges and 6 month earnings cycles,” he says.

Armitage will look to explore co-investment opportunities as a preferred way to access opportunities thrown up by the current market dislocation, Armitage says.

A little over 20 per cent of MLC’s diversified fund private equity allocations are thorough co-investments, meaning the funds direct investments into companies introduced by the PE general partners. Seventy-six per cent of the fund’s PE allocation are primary fund investments and the remaining 3-4 per cent are in legacy fund of fund investments.

“This dislocation is the greatest we have seen since second world war – at times of dislocation things that have been bubbling up tend to be accelerated at this time,” he says, noting that while his team will be opportunistic about new private equity co-investment opportunities, fund liquidity remains top of mind as does the quality of opportunities.

And while drawing comparisons to other time periods is natural, Armitage is quick to point out that investors find themselves in unchartered territory, for many reasons, not least because government mandated economic shutdowns are unique.

“The range of potential outcomes is unusually wide, investors need to find ways to protect themselves in the face of these outcomes,” Armitage says.

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