Investors should embrace idiosyncratic risk factors in their pursuit of outperformance – an asset allocation framework at odds with modern portfolio theory, according to Ashvin Chhabra, CIO at the Institute for Advanced Study (IAS). AMANDA WHITE reports. By clearly defining their objectives, investors can distinguish what they can and can’t control through their investment strategies. “What are the objectives of your process? What risk, return and drawdown do you need? Then your process is the execution of how to get those objectives. The quality of managers, and things like the amount of leverage, costs, all help in shaping a realistic risk management,” Chhabra told the CFA Institute Asset Allocation and Risk conference in Chicago last month. “You can’t control market returns and volatility. The risks you don’t know about are incredibly important. People associate risk with volatility – the variability of returns – but if you control variability then it’s not a risk anymore.
New normal, but some things are familiar
It’s been called the age of uncertainty and, famously, ‘the new normal’. But global equity managers should feel they have dealt with the major investment themes playing out in markets worldwide at least once before. David Marvin, chairman and portfolio manager at $4.5 billion global equity shop Marvin & Palmer, laid out the broad bets he’s making at an ASFA lunch last month. He is overweight the fast-growing emerging markets and the energy, materials and industrial companies benefiting from this growth; and he favours the luxury goods businesses of Europe which are exporting increasing volumes of stock to the growing number of high-end consumers in the emerging world.
China property: bubble, toil, trouble?
The China property market is now being considered by bubble watchers, with fears that one of the greatest stories to come out of the gloom of the global financial crisis could fall victim to the cyclical, populous investment movement known as asset bubbles. While there was evidence of some aspects of the China market becoming overvalued, industry sources doubt this really is enough cause for concern. Asian equity and property markets and commodity markets were all named as potential candidates for a bubble in the MLC Investment Insight report for February 2011, an Investment Roadmap. MLC Investment Management investment strategist and co-author of the report, Michael Karagianis, warned investors to approach the Asian markets in general with “great caution.” “Asia probably comes up in many people’s minds as potentially a focal point for asset bubbles,” said Karagianis. “The reason for that is the policies that have been run in Asia since the financial crisis have lent themselves to very substantial capital inflows from other markets, so investors globally funnelling money into Asia.”
TEG transitions to enlightened, risky business
For Barry Sheehan and Stuart Nixon, the new standard for enlightened businesses is the strategic advisory role, which aims to raise client value through the fusion of strategy, advice stemming from knowledge and wisdom, and consultancy through professional support. Sheehan, a former chief executive of HSBC Asset Management and Tyndall Investment Management, and Nixon, a former chief operating officer at HSBC and chief financial officer at the boutique manager Karara Capital, are principals of TEG Partners (formerly The Enlightenment Group). If TEG Partners sounds a little new age, it is. Sheehan believes that the world is in transition and the old ways of doing business are not working.
Managers overrated, AussieSuper unsurprised
Australian fund managers aren’t as skilful as their track records suggest, Inalytics research is claiming, but that’s not news for AustralianSuper chief investment officer Mark Delaney. The London-based investment skills consultancy firm’s most recent research concludes that an excellent investment track record by Australian funds managers overstates their investment skills and has the potential to mislead investors. Australian funds managers’ excellent performance all comes down to one key decision, the research suggests, to underweight in listed Real Estate Investment Trusts (REITs). “When we first did the numbers, it revealed that two thirds of managers outperformed their benchmark.
CLOs emerge from CDO shadows
The sentiment towards most asset classes took a hammering during the financial crisis, none more than structured finance. But, according to one of the largest managers in this space, if you looked at the details many investments performed well. Babson Capital, which is either the largest or second-largest manager of CLOs (collateralised loan obligations) in the world – depending on your measurement period – believed that the financial crisis had actually proved that these sorts of instruments did, and do, what they promised. Matt Natcharian, managing director and head of structured credit for Babson, admitted that CLOs had been tarnished by the reputations of their less-secure cousins, such as collateralised debt obligations (CDOs) and the general sub-prime mortgage mess. “But bank loans aren’t subprime mortgages and CLOs are not CDOs,” he said.
Equity managers face a taxing issue
The Cooper Review pointedly suggested that trustees must consider tax consequences when instructing managers about mandates. The after-tax implications are too important to get it wrong. Industry experts have said there would be some profound changes in funds managers’ behaviour as the influence of after-tax benchmarks became more widespread and super funds began to manage their accumulation and pension assets separately. Andrew Nolan was passionate about after-tax implications in Australian equities and the downside for super members when managers or trustees were wrong. Nolan, head of investor solutions at Warakirri Asset Management, said funds should award, measure and review Australian equities mandates on an after-tax basis, thus aligning manager behaviour with member benefits. Warakirri offered a specific portfolio measurement tool, and this service had just been joined by the FTSE ASFA Australia Index Series.
Don’t wear the costs of tail-risk hedging
During the financial crisis, Simon Ho was busy advising and selling research to hedge funds through the investment company, at which he is CIO, Triple3 Partners. Ho, who ran Goldman Sachs’ currency book from London and held senior trading positions with Deutsche Bank in Sydney and JPMorgan in Singapore before co-founding Triple3, also ran a small amount of capital, about $20 million, in a volatility strategy for some offshore investors as larger managers launched their own options-based products, aiming to capitalise on the rough market. But when managers, such as global bonds powerhouse PIMCO, began spruiking tail-risk hedging strategies as the recovery began, he began to seek a broader audience for Triple3 Partners. Ho said the tail-risk hedging strategies put forward by managers sacrificed too much investment gain for too little protection. “We are adamantly opposed to tail-risk hedging. It has a deleterious effect on portfolios.”
Palisade in $100mn power dealPalisade in $100mn power deal
An 82 megawatt peaking power station will be developed in Western Australia following an equity commitment to the project from Palisade Investment Partners. The specialist Australian infrastructure fund manager, responsible for $750 assets under management, invested in the $100 million greenfield project in collaboration with anonymous individuals after being approached by the original developer. The project’s promise of longterm stable cashflows was what attracted the Palisade team to it, said Palisade’s director, Roger Lloyd. “This project connects to the WA – particularly the south-west – energy market and the revenue source is largely based on investor credits from a government counterparty, being the WA Government [as] the market operator. So it’s a fairly stable cashflow,” said Lloyd.
Tibra tax fund anything but derivative
Trading firm Tibra Capital has launched a unique take on the tax-aware Australian equity fund as the first product for its relaunched investment management division. Tibra Investment Management has drawn on its parent’s experience in derivatives trading and riskmanagement to launch a fund – the Tibra Australian Equity Fund – it claimed can exploit a glaring inefficiency in the way equity derivatives were priced. “The pricing of stock options are determined by factors such as expected dividends, interest rates, time to expiry, the strike price and expected volatility. The market does not, however, incorporate the value of franking credits,” according to the fund’s portfolio manager, Stephen Richards, who came to the firm in January 2010 after three years as head of equity derivatives at Westpac. Backtesting had found that exploiting this mispricing could add 2-3 per cent a year on top of the post-tax ASX 200 benchmark, as long as the investor in question was a low- or no-tax payer such as a super fund or an allocated pension vehicle.
Industry Fund Services to launch platform
Industry Fund Services (IFS) has flagged plans to launch an investment platform for distribution through its financial planner network. The platform will offer multiple asset classes from a variety of funds managers, including Industry Funds Management, while manager selection and portfolio construction will be assisted by Frontier Investment Consulting.
