Andrew Whittaker, the portfolio protection strategist in QIC’s $65 billion state investment team, thinks the market outlook is rich with opportunities despite the high-volatility environment becoming somewhat of a norm.
As the fund shifts gears to lean towards a total portfolio approach and away from strategic asset allocation, it is looking for more flexibility and better outcomes beyond just optimised sub-portfolios.
“Over the years, we’ve an approach which sits at either end of that spectrum, but for the forthcoming environment, we think it’s going to be a volatile one,” he tells Investment Magazine.
“We think a total portfolio approach… will be highly desirable in an world where we’re perhaps not going to have lower yields driving asset prices higher.”
QIC is partly a sovereign fund of the Queensland Government and its statutory bodies including schools, local governments, universities and (with government approval) some charities; and partly an asset manager, with mandates from other global and local pension funds.
The fund’s state chief investment officer, Allison Hill, is set to appear on a panel at the Investment Magazine Fiduciary Investors Symposium in May to discuss credit opportunities in the age of debankification.
Whittaker, being the investment director of strategy and implementation, sits in the top-down team with remits including strategic tilting and tail protection.
“I think it [the forward-looking environment] is exciting because volatility provides opportunity,” he says.
“But it also means for a multi-asset class investor, who’s been able to just ride off the coattails of equity and bond beta for the last, say, 20 years, the new environment takes a bit of getting used to.”
Fruitful environment
The fund has come to value genuine diversification even more after a tough 2022, Whittaker says, as the 20-year negative correlation streak between traditional asset classes like bonds and equities came to a halt when they underperformed simultaneously.
The year was “hard to swallow”, he says, but it prompted the fund to expand its thinking around alternatives by introducing investments such as catastrophe insurance, which returned some 20 per cent in 2023.
“Under our previous approach, alpha had to be underpinned by some sort of empirical or economic rationale,” Whittaker says.
“But we’ve now broadened that definition to incorporate idiosyncratic alpha, or skill-based approaches, which facilitates investment in a broader suite of liquid alternative strategies.”
The word “liquid” is critical here, as Whittaker says QIC needs to keep its options open when the right investment comes along.
“I always like to say that success doesn’t just occur. When opportunity meets preparation, hopefully it can culminate to material performance for our stakeholders,” he says.
“The forward-looking environment is going to be a target rich one, and if you’re a liquidity provider, you want to be able to take advantage of that prevailing opportunity set as it arises.
“This could be establishing a toehold into asset classes like European real estate and be prepared to partake if that asset class bottoms out or finding ways to access private markets via liquid proxies.”
In other areas, Whittaker says equities, particularly in the US, are looking expensive but the fund is hesitant to tilt underweight while momentum remains one-way.
Private debt and infrastructure remain high-conviction asset classes for QIC, especially in potentially a higher-for-longer outlook for interest rates. For credit broadly, Whittaker says the fund is taking a barbell approach.
“US investment grade credit is looking somewhat more expensive, so perhaps you may want to utilise synthetic credit markets to obtain some cheap protection,” he says.
“But, in turn, you may want to augment that with some really attractive-returning securities in that private debt space where you can earn high single-digit returns for credit that is relatively senior in the capital stack.”
The Investment Magazine Fiduciary Investors Symposium will take place on 14 May at Blue Mountains, NSW. For more information, visit the event page here.
