Interview source: Citywire, 17 April 2023
How do you think about investment beliefs on an organisational level, and how does the investment committee guide this?
Our investment philosophy is really that active management of portfolios can add value over and above indexing. So one of the real premises is that markets are effective, not efficient. And there’s plenty of examples of times when the buyers don’t have the same information as all sellers. So we don’t 100% believe in efficient markets.
But we do think that developing portfolios for private clients, which is what we predominantly do, there are some nuances to that that don’t necessarily carry through to the institutional market, particularly around liquidity, particularly around tax such as franking credits.
There is a lot of discussion around offering rich debate with diverse views to inform beliefs and portfolio decisions. How do you look to achieve this?
There’s five of us on the investment committee, and we pretty much have a consensus view around things. We’re all pretty widely read, we all attend a lot of fund manager presentations and do a lot of reading and a lot of research. We don’t like having a cast of 1,000s on our investment committee, we try to avoid that. Because you end up with groupthink.
Do you segment approaches across accumulation and retirement or are there other ways to standardise some of the portfolio templates?
Yes, we have a multi-strategy portfolio. We have 12 portfolios, three of which are multi-asset, multi-strategy portfolios with different risk and return objectives or particular return objectives. So we tend to think collectively across them, but they’re made up of different components. That’s where the differences are: the components that go into them. So we might have some debt securities in the conservative portfolio: we don’t have any fixed income of any notion in the growth portfolio. We don’t really have to think about that too much. We just know that if we’re overweight maturity, that’s not going to apply to the growth portfolio. We tend to think about the underlying building blocks of the portfolios. And then we’ll sit and talk about the tactical asset allocation over the top. So they’re kind of two different things.
The past 40 years saw a steady decline in yields, which has reached a reasonably dramatic inflection point. Do you see this as a temporary phenomenon or part of a new regime?
It’s difficult to separate the structural from the cyclical, when it comes to inflation and therefore bond yields. I think we’re in a secular deflationary environment. And I still think we have demographics that are deflationary. We have technology that is deflationary. And we have a globalisation question mark, which is deflationary. Certainly, the Ukraine/Russia situation is not globalisation. It’s the opposite.
But those three forces are pretty much still there. But we have a cyclical uptick in inflation that’s caused by a combination of too much money being printed. And then a whole bunch of supply chain issues around not just Europe but also Covid-19 locked down.
I think we go back to deflationary pressures. But the transition and the timing of it is a little bit uncertain.
Do you see cash growing as an allocation in this environment?
I think the days of holding zero cash because it was a drag on returns are over. Volatility suggests that you hold a bit more cash, so you can be opportunistic. So I think the idea of constraining cash to 2%, when you’re building portfolios, that’s probably gone. People will let it drift higher, and it won’t be uncommon to see 5-10% allocations to cash in portfolios. Particularly where liquidity is important, or there’s a short-duration liability profile, given you can get 4% or 4-ish% on cash around the world, it’s going to be a much bigger part of portfolios.
What about gold, or indeed other commodities required for an energy transition? What do you think about their merits as a hedge against inflation?
Gold is an interesting one. I’d probably treat it differently from battery raw materials, or copper and these sorts of industrial metals, because I don’t think it really has that purpose. I think it plays a really good airbag role in portfolios. We can see in history when, whenever there are really high uncertainty and huge dislocation in markets like we had in March 2020, or back in March 2009, gold performs very well, and it’s one of the few things that does. So it’s like having an airbag in the car.
So I think it’s got that role, and it’s negatively correlated with the US dollar. And it’s possibly correlated with inflation expectations. But I think you’ve got to use it tactically. You’re not going to make a heck of a lot of money through the cycle of owning gold.
We need to get exposure to the energy transition. And that’s not just being underweight fossil fuels; that’s being overweight everything else. I think things such as nickel, graphite, lithium and these sorts of materials do make a lot of sense in a portfolio from a long-term perspective.
We’ve seen different strategies across fixed income including duration plays and private credit grow in popularity. Is the extra risk worth it?
What we’ve tended to do is concentrate on the floating rate part of the market, and specifically bank hybrids. So we’ve got a pretty strong expertise: two people on the investment committee have a very strong history in hybrids, so we know that space very well.
But now with the yield curve being the way it is, there is some merit in going further out in terms of duration. We’ve got a little bit of credit, but we’re a little bit worried about credit at this point in the cycle, both public and private markets, just because we haven’t really seen loan rates go up, or we haven’t seen defaults in any meaningful way, despite the fact that interest rates have gone up quite quickly. So we’re a little bit wary on credit. There will be a time to buy credit; we just don’t think it’s now. We’re just a little bit more cautious.
Real assets have seen strong performance in a low-yield environment. What are your views on the next decade for infrastructure and real estate?
For most real assets, you have to give up liquidity to access them. And certainly that’s the more traditional way that the big industry funds and the Future Fund etc. access them.
So for the private investor, whom we mostly look after, can you access those things without giving up liquidity? It’s quite difficult. And when you do start adding liquidity in structures, it does tend to drag down the returns because you need to hold a lot of cash.
We don’t have big allocations. I suppose the one exception to that is listed infrastructure. It’s still a little bit equity-like, but we’ve had some success in investing in global infrastructure. That’s performed well in a rising-inflation environment. We may have seen the best of returns, because a lot of infrastructure investments were a really good investment last year. But we think probably the best returns from global infrastructure are behind us and not in front of us.
‘Particularly where liquidity is important, or there’s a short-duration liability profile, given you can get 4% or 4-ish% on cash around the world, it’s going to be a much bigger part of portfolios’
Many institutional investors have leveraged private equity, and the premium that can carry. What role do these assets play in your portfolio conversations?
Within our SMA structure we need everything to be daily liquid. But the wholesale opportunity is a large and growing one. There’s demand because clients want to access that private equity return distribution. Also on the supply side, we’re seeing the Hamilton Lanes, the KKR and the Partners Group are starting to bring more product to the Australian retail and wholesale market. So there’s quite a lot of activity in that space, and we’re participating in that. We’ve got a recommended list among portfolio and client interests in that private market space, but not necessarily in the SMA.
With equities, where are you allocating your active budgets?
We’re underweight global equities and overweight Aussie equities. Just because we see more resilience in the domestic economy, we think there’s a real risk that central banks everywhere tighten too much. We think Australia has an immigration story to it. And it’s got elevated commodity prices and a relatively sensible fiscal position. Whereas I think in some other markets, notably the US, you’ve got runaway fiscal spending, a central bank that is tightening quite aggressively, and they don’t necessarily have the levers to pull in terms of labour market supply, bringing 11 million workers in, which they need to do.
So from a macro perspective, favouring onshore equities, to global equities. And within global equities, we’re really letting our managers choose the allocation because we tend to allocate to managers rather than regions or sectors. They are typically favouring Asia and Europe as recovery plays, and particularly around China. But also the fact that the energy crisis in Europe doesn’t seem nearly as bad as people thought. And staying underweight the US on valuation measures, the US market still trades at a five or six times PE multiple to the rest of the world. Yet it doesn’t seem to have the same growth factors that it’s had before.
Which styles are attractive to you in equities – value, quality, growth etc?
We’re trying to be market neutral when we manage Aussie equities, because we have a growth strategy and a value strategy and an income strategy. So we offer three large-cap Australian equity portfolios, and we let investors choose what style they want.
But we also actively manage the core portfolio that’s designed to be style neutral, and that’s how we do Aussie equities.
When it comes to global equities, we’re almost always adding them to an Aussie equity portfolio. So we really have to think hard about diversification. We don’t want to go offshore and buy a whole bunch of banks, a whole bunch of miners and supermarkets. You tend to find them a lot in global value portfolios or global income portfolios. So unless the client specifically wants the income on the global equities, we will tend to have a growth manager in there because we look at the composition and it’ll be IT and healthcare. They’re the largest and fastest-growing industries in the world.
So they blend really nicely. We’ve got lots of banks and miners and supermarkets in Australia. And then we’ve got tech, healthcare, consumer services and different brands in the global, and that really nets itself out. So we do have a bias to growth managers in global markets.
Are there particular themes that you are looking to cascade across each asset class – for example, digitisation, demographic trends, decarbonisation?
No, we tend to be pretty macro driven. Our thinking on the sort of portfolios that we run, which are the large-cap, Aussie equities and hybrid, hybrid fixed income or hybrid interest, portfolios, we outsource everything else. So in terms of the Aussie equity portfolios, we tend to be very macro driven.
We like the energy transition, so we’re going to have some lithium stocks in the portfolio. But it’s completely macro driven. If we see a big slowdown in EV production somewhere in the world, we will reduce that position.
So we’re not going to stay long through the cycle. We just think that that adds a lot of volatility. And if we can hopefully time when we move in and out of those sectors, we can add some value. So we’re trying to come up with a no-excuses portfolio rather than saying, ‘Well, okay, we’re along this theme, and it’s not working, but it will work longer term; you have to bear with us!’
We tend to try to move in and out of things. We’re trying to be a bit more nimble, knowing there are themes there such as the industrialisation of China, the rise of the consumer, the move to a cashless society, energy transition. There’s some long-term themes driving returns but we’re not just going to buy it and hold it. We think we can do a bit better than that.
