Mine Wealth + Wellbeing hunting for idiosyncratic returns

By

08/08/2017

Mine Wealth + Wellbeing plans to lift its exposure to hedge fund, multi-asset and alternative risk premia assets, while embracing more idiosyncratic strategies within this part of the portfolio.

Robert Graham-Smith, a senior investment analyst at the $10 billion Newcastle-based industry fund formerly known as Auscoal, says that as well as complementing existing exposures, he expects the focus on more idiosyncratic strategies to significantly enhance returns and improve diversification.

Graham-Smith defines idiosyncratic strategies as those that place greater emphasis on building up trade selection, from a tactical perspective, to create a portfolio less reliant on traditional market returns.

Hedge funds, multi-asset and alternative risk premia assets currently represent between 5 to 10 per cent of Auscoal’s total assets under management.

Over time, Graham-Smith expects this to grow. The ‘alternatives’ target range for the growth and aggressive investment range options is 16-46 per cent and 16-29 per cent respectively.

At the multi-asset end of the spectrum, the fund is interested in managers with a greater focus on idiosyncratic positions, as opposed to classic allocators.

Graham-Smith expects these positions to provide healthier competition for capital with hedge funds due to the greater liquidity and lower fees they offer. “Any investment in this space would require an attractive liquidity profile, and most offers are daily, weekly or monthly, while anything greater than quarterly becomes more difficult,” he says.

The managers Mine Wealth + Wellbeing is currently looking at cover a wide range of markets, and invest across a breadth of opportunities offering the potential for attractive CPI + return profiles over the medium term. Part of trick, adds Graham-Smith is anticipating how a portfolio manager is likely to behave in distressed market conditions.

While there’s often limited third party research in the multi-asset space, Graham-Smith’s investment team works hard to identify new opportunities.

Turning over more rocks

“In addition to using our own networks, we turn over rocks, and make sure we’re on the road at least two to three times a year,” says Graham-Smith who was recently in the UK and US assessing a range of multi-asset, hedge fund and alternative risk premia opportunities.

“Another difficult factor can be working out the role of a multi-asset fund strategy within an overall portfolio.”

The Mine Wealth + Wellbeing investment team views any potential allocation as a ‘competition for capital’ across the liquid absolute return part of the portfolio – effectively weighing up the diversification, return and risk characteristics for fees charged – against hedge funds, other multi-asset products and alternative risk premia offers.

None of these strategies have silos with guaranteed allocations.

Graham-Smith cites long ‘core’ European government bonds (Germany, Netherlands, Finland…) versus short ‘peripheral’ European government bonds (Italy, Spain, Portugal, Greece…) as an example of a potential trade at the more idiosyncratic end of the spectrum.

Following extensive liquidity provision and asset purchases by the European Central Bank, since the European Debt Crisis, peripheral bond prices have rallied significantly. However, in a major risk-off event, Graham-Smith expects ‘core’ bonds to outperform those of ‘peripheral’ European countries.

While this investment could be executed via any number of instruments and timeframes, he says this is just one example of a holding that some multi-asset funds, global macro hedge funds and global bond managers could all potentially own at a point in time.

Given that most managers remain diversified in their own right, Graham-Smith says it’s clearly important for the superannuation fund to monitor its aggregate exposures and potential ‘crowding’ across managers within its own portfolios.

“While we don’t have a specific ‘bucket’ that we have to fill, our focus is more on seizing opportunities as they surface based on their merits,” he says. “It all comes down to what they can deliver from a portfolio construction perspective, relative to the overall fund and other potential investments.”

Mine Wealth + Wellbeing senior investment analyst Robert Graham-Smith will participate in a panel, titled ‘What’s the role of a multi-asset fund in the total portfolio?’, at the upcoming Investment Magazine Absolute Returns Conference. For more information about the conference, to be held in Sydney on September 14, 2017, please visit the event website or contact Emma Brodie via [email protected] or +61 2 9227 5708.