Drivers of return will change following a structural shift to a higher inflation environment, experts said in a wide-ranging panel discussion about the best growth opportunities for investors, pointing to opportunities in the energy transition and syndicated loans as particularly appealing.
Speaking at Conexus Financial’s Fiduciary Investors Symposium held in Sydney’s Blue Mountains region, funds appear to operate under subtly different definitions of growth assets amidst concerns that the definition of defensive assets has stretched.
Tom Nitschke, portfolio manager, diversified funds at Bendigo and Adelaide Bank, defined growth assets to be those “sitting on the equity side of the balance sheet”, while Scott Tully, head of investment option development at superannuation fund REST, worked off a broader definition.
“Growth is the part of the portfolio that is going to deliver those long-term returns, so that captures equities but it also catches all those other mid-risk assets that have an element where you are putting capital at risk to generate return,” Tully said. “You are not putting it there to protect, but to grow”.
While Tully was somewhat light-hearted in his observations about creep in the definition of defensive assets, Nitshcke was more direct. “There has been stretching of what a defensive asset is in terms of classifying unlisted assets in that bucket,” he said. “We are somewhat finding out the hard way that some of those unlisted weren’t as defensive as what we thought given the movements in interest rates and how levered they are to bond yields.”
Tully said investors are demanding more from their growth assets to meet their real return targets in an environment of high inflation.
But this obviously doesn’t mean stretching existing asset classes further, he said. “You introduce…a different sort of risk when you start chasing outcomes that aren’t natural for that particular asset class,” Tully said.
Credit an interesting case study
Syndicated loans in the United States offer diversified exposure to the US economy, as opposed to the more global exposure (given international operations) typically offered by equities, said Wynne Comer, chief operating officer at investment advisor firm AGL Credit Management (a subsidiary of the Abu Dhabi Investment Authority), which specialises in senior secured bank loans.
The syndicated loans space in the United States is as big as the high-yield bond market, she said.
“And then alongside that is the dramatic growth in terms of private credit,” Comer said. “So we have been focused only on broadly syndicated loans and now we’re actually tiptoeing into private credit as well.”
With markets having shifted to a high inflation environment, it is beneficial to be lending to corporates with floating rates, she said.
“In terms of where the alpha is, certainly with banks retreating from the market…we’re going to see more of the market moving towards direct lending,” Comer said.
Nitschke noted that while last year was a “horror year” of inflation, Bendigo and Adelaide Bank is still ahead of its objectives when looking at a ten-year horizon. Markets have undergone a structural change, and investors will need some time to work through the transition, he said.
“If you try and get an asset class to do more than what it can, you can end up in adverse returns chasing markets, and your outcomes can be worse off as a result,” Nitschke said.
There are “fantastic opportunities” for investors in the ongoing energy transition, he said, pointing to the various metals it will require along with vast amounts of energy that the transition will require.
“Understanding that whole energy transition and what’s on the right side of government, what’s not, it’s a large amount of work with a huge amount of opportunity,” he said.
An investor in 2011 could have allocated to the NASDAQ and this would “make you the king” over the past decade, he said. But it is hard to imagine technology stocks growing to the same incredible metrics as Apple in the coming decade.
“You go from a period where the beneficiaries of falling interest rates are definitely private equity, the VC space and unlisted property,” Nitschke said. “The “winners will change” in a period of higher inflation, he said.