The Covid-19 selloff shocked many, but total return investors used it as an opportunity to observe their managers under duress and prepare for a new regime of lower returns.
“The first quarter really was the mother of all stress tests for the portfolio, said Scott Pappas, senior portfolio manager, absolute returns at Cbus Super during a panel at Investment Magazine’s Absolute Returns Conference.
“We were not surprised by the financial market crisis, how the impact was new and interesting, but it helped reinforce our decisions,” Pappas said.
Huey Miin Lim, portfolio manager, fixed interest and absolute returns at VFMC, said the market ructions were a good time to assess manager performance.
“Some managers provided their idiosyncratic views and shifted from a macro strategy to a relative value strategy,’ she said, adding different points of view can be a powerful driver of total return strategies.
“It was a good time to look closely at how managers managed risk, and also how they managed liquidity shock which was a key thing that happened in March.”
VFMC generally constructs its portfolio of managers from the bottom-up, rather than looking to allocate to a macro or relative value points of view.
“Our managers each have an edge in what they’ll deliver, and we invest in data and research which is difficult to replicate.”
Lim described the fund’s preference for low to negative correlation to broader equities markets.
“In a return seeking portfolio, we try to catch a manager’s skill in finding distinctive ideas against equity beta,” she said. “So we tend to avoid long/short equity managers.”
Pappas outlined Cbus Super’s diversification approach which aimed to exploit risk premiums, rather than tap into the idiosyncratic views of managers.
“Whether it’s a volume reduction or from diverse income sources, we expect there to be diversification as things change over the cycle,” he said.
Following the stresses of this year, Cbus Super has made some slight course corrections.
“We’re now looking at being more refined in how we allocate to those strategies,” he said. “We’re thinking more about short term equity market sensitivities.”
Lim outlined how VFMC took advantage of some key relationships to manage the selective capacity that was allocated to the fund.
“Fixed interest relative value was a space where capital was raised as a result of the volumes we saw in March,” she said.
When asked about the poor performance of bonds during market upheaval, both portfolio managers agreed that alternative strategies were needed.
“The role of bonds in a portfolio to provide balance are much more uncertain now than five or ten years ago,” Pappas said. “So we’ve had to think across diverse levers that can be more defensive in nature.”
Lim said fine tuning existing exposures can help protect against the inevitable equity correction.
As money managers stare down the barrel of the post-Covid19 landscape, low rates and faltering economic growth means managers need to adjust their expectations.
“Assets all over aren’t going to return or behave the way we’re used to,” said Pappas. “There are real uncertainties around trade and new monetary theories, so if someone could solve those problems we’d all probably sleep better at night.”