Thinking about risk and downside portfolio protection has become a lot more interesting for Chris West, co-founder of Context Capital Consulting, since his departure WA Super.
West, who was the fund’s chief investment officer before its merger with Aware Super, a deal that was finalised in December last year, started the consultancy focused on wholesale advice, family offices and smaller institutions with former members of his Perth-based investment team, Chris McAlpine and Mark Foo.
Working on and leading an investment team within a superannuation fund brings with it access to a lot of information and good ideas, but it also brings with it a number of constraints on how you invest as well as the outcomes you shoot for, West said during a conversation recently with Investment Magazine’s Market Narrative podcast series.
Peer risk, fee constraints, and overall career risk are all factors weighing heavily on the minds of individuals on investment teams at super funds, West said.
“Going outside the box [when you’re at a super fund] is difficult,” West commented.
“There is an opportunity to be bolder than the super industry forces you to be,” he continued.
“There is opportunity to take more risks in the interests of the end investor,” he said.
Working with financial advisers and family offices who are closer to the end investor will of course make it easier to customise a portfolio for specific risk outcomes, West acknowledged.
One person might perceive risk as not losing capital, another might define risk as being closer to a peer set, another might define it as how quickly you’re able to recover after a market drawdown, West commented.
Thinking about how different individuals perceive risk has led West to ponder traditional approaches to portfolio construction, particularly in light of current central bank settings.
“Particularly those with long time horizons who are unconstrained we think its important to be having these conversations to positively skewed assets,” West said, highlighting that in the current low interest rate and returns environment median distributions have moved more towards zero and there is an increased the chance of negative returns.
“Once we illustrate that, that’s when people get on board for wanting to do something different,” he said.
“It’s like having precious metal allocations which we might not have thought was possible. When the cost of carry on bonds exceeds the cost of carry, it should be compared on its merits. It’s a trade-off very different than it used to be,” he said.
Crypto is of course where a discussion about risk and the challenges super funds have in terms of thinking outside the box leads in the current market environment fueled by low interest rates as seemingly endless government sponsored stimulus.
“We can get into a religious debate about [crypto] but think about it from efficient market hypothesis [perspective] – am I better to think about generating alpha in large cap companies with lots of people competing in, or am I better finding hedge fund managers who can focus on an asset class that isn’t adopted? The biggest opportunity is hedge fund and market neutral because there are a lot of skilled traders and hedge fund people who have moved into that pool,” he said.
Skill risk is just another allocation of risk which you can allocate in another way,” he said.
“We think what’s really important before you work on the solution to the portfolio is actually work on what you define risk as in your portfolio,” he said.