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ALTERNATIVES

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					 16 Investment & Technology                               COVER STORY                                                      May 2008                  May 2008                                                                      COVER STORY                                                       Investment & Technology 17




ALTERNATIVES:
                                                                                                                                                     W     hat are alternative assets
                                                                                                                                                               how many of them
                                                                                                                                                                  w
                                                                                                                                                              und have in its portfo-
                                                                                                                                                                                                                                              says.
                                                                                                                                                                                                                                                   “My view is that unlisted infrastruc-
                                                                                                                                                                                                                                              ture, property and private equity are
                                                                                                                                                                                                                                                                                             on equities in 1997, in three years you
                                                                                                                                                                                                                                                                                             wouldn’t have had a business left but in
                                                                                                                                                                                                                                                                                             a fund like ours you’re there. The LTAR
                                                                                                                                                                                                                                              not truly ‘alternative’, they just have a      is the dream portfolio of my team…
                                                                                                                                                              ment complicated by the                                                         different method of price discovery, and        we model 40 different scenarios for the
                                                                                                                                                               sset allocators disagree                                                       in fact are not being priced properly in       future, select a cohort of the most likely
                                                                                                                                                                  fine
                                                                                                                                                                defi ‘alternatives’ at                                                         many instances.”                               scenarios and manage the portfolio
                                                                                                                                              all.                                                                                                 Condon walks his talk. MLC’s              around tolerances toward those.”
                                                                                                                                                   “Alternatives is a stupid term,” one                                                       Long-Term Absolute Return Portfolio
                                                                                                                                              head of investments for an insurance                                                            (LTAR) is about as different as they                 Jeff Rogers, the chief investment
                                                                                                                                                     says.
                                                                                                                                              fund says                                                                                       come in terms of investment objective –        officer at ipac, agrees with Condon that
                                                                                                                                                   “We have a variety of different                                                             a 5.5 per cent real return (after inflation,    “it doesn’t have to be illiquid to be an
from lack of liquidity to questions over their correlation to ‘traditionals’. Notwithstanding their track record of strong lowly correlated   assets and we look at the fund as a              David Chessell ...
                                                                                                                                                                                                                                              fees and tax) over a genuine 20 year           alternative”, but contends that the reality
                                                                                                                                                                                               better handle on assumptions if alternatives
                                                                                                                                              whole. Australian funds have too many            viewed as a group                              horizon, with ‘neutral’ long-run target        of packaging products, particularly in
                                                                                                                                              buckets.”                                                                                       allocations overlaid by strategic tilts        his milieu of the financial planner mar-
                                                                                                                                                   The chief investment officer of             lump unlisted assets together is because         based on five-to-eight year intermediate        ket, does make definitions helpful.
                                                                                                                                              NSW State Super, Martin Drew, is               we think we have a better handle on              outlooks.                                           “You’ve got to remember that in the
                                                                                                                                              more diplomatic but gives himself              assumptions than if we looked at them                 Yet a glance at the fund’s investment     US, any kind of property is considered
                                                                                                                                              plenty of latitude with his approach           separately.”                                     strategy reveals surprisingly little in the    an alternative asset, simply because
                                                                                                                                              to the ‘a-word’: “Alternatives is a broad           A new survey of super funds by              way of what one might immediately              there’s no tradition of investing in it as
                                                                                                                                              term with no strict definition. I view al-      UNSW Associate Professor John                    think of as ‘alternative’ investments.         there is here,” he says.
                                                                                                                                              ternatives as anything that isn’t equities,    Evans would appear to prove Ray King’s                If we take JANA chief executive Ian            Rogers has been thinking a lot
                                                                                                                                              bonds, property or cash. So that leaves        assertion that a broad grouping of               Patrick’s elegant definition of ‘alterna-       about alternative assets lately, as his
                                                                                                                                              infrastructure, private equity, hedge          alternatives is common market practice           tives’ as “anything that’s not a straight-     team overhaul the portfolios it offers
                                                                                                                                              funds, et cetera.”                             in Australia.                                    forward investment at arm’s length in a        to clients to include an “alternative
                                                                                                                                                   The founder of Sovereign Invest-               Sponsored by Swiss private equity           security listed on a public market”, then      markets” portfolio and an “alternative
                                                                                                                                              ment Research, Ray King, says that             fund-of-funds Adveq, the survey was                                                             alpha” bucket.
                                                                                                                                              regardless of the semiotics, viewing           particularly interested in how the $250                                                              The “alternative markets” bucket will
                                                                                                                                              ‘alternatives’ as an asset class in itself –   billions’ worth of respondents categor-                                                         make up 3 per cent of ipac’s core diversi-
                                                                                                                                              no matter how broadly defined – can             ised their private equity allocation.                                                           fied portfolio, and will include what
                                                                                                                                              harm returns.                                       Just 40 per cent put private equity                                                        might be termed the ‘alternatives usual
                                                                                                                                                   “A common market practice is to           in its own bucket – for 24 per cent it                                                          suspects’ of private equity, infrastruc-
                                                                                                                                              broadly group alternative investments,”        was lumped in with ‘non-traditional’                                                            ture, distressed debt and commodities.
                                                                                                                                              he says.                                       assets, 18 per cent filed it under ‘private                                                      Rogers says these exposures should be
                                                                                                                                                   “Sovereign’s view is this diminishes      markets’, 12 per cent thought they had                                                          moderately correlated to equities, but
                                                                                                                                              the scope to exploit investments with          defined ‘alternatives’ well enough to put                                                        less volatile, and have the propensity to
                                                                                                                                              very distinct properties – we believe          private equity in a bucket of that name,                                                        deliver higher returns.
                                                                                                                                              asset allocation analysis of these invest-     while 6 per cent classified it as part of                                                             There are some other intended
                                                                                                                                              ments must be relatively disaggregated         ‘total equity’.                                                                                 inclusions in the “alternative markets”
                                                                                                                                              and study specific characteristics.”                 Preferring to remain anonymous,               Chris Condon ...                             bucket which further stretch the already
                                                                                                                                                                                                                                                concerned that many insto investors equate
                                                                                                                                                   That’s not a view completely shared       our aforementioned insurance fund                  ‘alternative’ with ‘illiquid’                loose definition of the a-word.
                                                                                                                                              by an asset consultancy which has              CIO says that many investments which                                                                 For example, Rogers says the bucket
                                                                                                                                              become synonymous with ‘alternative’           are referred to as ‘alternative’ or a variant                                                   will include “public market long-only
                                                                                                                                              investments by Australian super funds,         on same are “just mainstream…Why                 the only MLC LTAR exposure that                mandates with no benchmark focus but
                                                                                                                                              Access Capital Advisers.                       is property development considered               really seems to fit the bill is its global      a superior risk-return trade-off ”.
                                                                                                                                                   While Access certainly assess each        ‘alternative’?”                                  private markets allocation, at only a               He cites as an example of this the
                                                                                                                                              sub-asset class on its individual merits            His fund separates unlisted from            ‘neutral’ 10 per cent.                         Morgan Stanley Global Franchise
                                                                                                                                              – how else could it not recommend any          listed investments because of the way                The emphasis elsewhere is on               Fund, which selects stocks from a
                                                                                                                                              hedge funds to clients – director David        they are selected and their different             unconventional approaches to tradeable         universe of approximately 150 listed ‘big
                                                                                                                                              Chessell finds it helpful to step back          time horizons. Unlisted trusts may have          securities, such as a 7 per cent exposure      brand’ names around the world, which
                                                                                                                                              and view the investment landscape in           a five, seven or 10-year lock-up: “that           to insurance-related investments like          in Rogers’ words have “built a moat
                                                                                                                                              black-and-white, or in his case tradi-         makes them a different ball game”.                catastrophe bonds and weather deriva-          around themselves” thanks to
                                                                                                                                              tional and alternative.                             Just as blunt is the chief investment       tives.
                                                                                                                                                   “When we run strategic asset alloca-      officer of MLC Investment Manage-                      In Condon’s view, the truly “differ-                intangible assets
                                                                                                                                              tion modelling, we run it in terms of the      ment, Chris Condon, who calls the                ent” aspect of the MLC LTAR is its
                                                                                                                                              main listed asset classes, what we call        ‘what are alternatives?’ debate “a crock…        method of portfolio construction, which                recurring revenue
                                                                                                                                              the market portfolio, and for alterna-         I’m concerned that many insto investors          is approached “on a scenarios basis
                                                                                                                                              tives as a single asset which we call the      equate ‘alternative’ with ‘illiquid’ and are     rather than the typical mean variance
                                                                                                                                              target return portfolio,” he says.             loading into these things with no clear          analysis”, according to Condon.
                                                                                                                                                   “We have to make the same as-             understanding of the risk to which they              “We don’t have the skills to                       on capital employed
                                                                                                                                              sumptions about expected return,               are exposing their funds, particularly           guarantee a successful TAA program                 Rogers says that long-only funds
                                                                                                                                              standard deviations and correlation as         now that we have fund choice,” Condon            over three years, we don’t think that’s        based around stocks with strong intel-
                                                                                                                                              we do for listed asset classes. Why we                                                          possible. If you’d taken a negative view       lectual property and patent stories
 18 Investment & Technology                                                 COVER STORY                                                                              May 2008                        May 2008                                                            COVER STORY                                                                        Investment & Technology 19



                                              as well, even though the funds typi-                                                                                                            a three-month period.               for their 50 per cent exposures            Chessell also points out              but ipac’s Jeff Rogers says a                   “We’ll be saying to clients,
                                              cally only cover a few thousand elderly
                                                                                                                                               Many investments                                    According to Ian Patrick,      to illiquid assets, does not           that alternative assets create            reasonable spread for the aver-           ‘if you’re going to sack us in a
                                              Americans.                                                                                                                                      JANA is presently testing its       think a run on a super fund is         their own liquidity.                      age 30 year old would be 80               year’s time on the performance
                                                  More clear-cut is what will consti-
                                                                                                                                               which are referred to                          super fund clients against a        likely either.                             “Our clients get cash back            per cent in the core diversified           of that 15 per cent, we need
                                              tute the core of the “alternative alpha”                                                         as ‘alternative’ or a                          liquidity scenario in which              “I don’t think the world          at an average of 14 per cent              portfolio, 15 per cent in ‘alter-         to have another conversation‘.
                                              bucket, which like the alternative beta                                                                                                         listed markets dropped 20 per       changed when choice of fund            per year on their unlisted asset          native markets’ and 5 per cent            The beauty of unbundling the
                                              portfolio is earmarked for 3 per cent of                                                         variant on same are                            cent and ongoing contributions      came in. After three years, the        portfolios, yield and return of           in ‘alternative alpha’.                   alternatives pieces the way we
                                              ipac’s flagship diversified portfolio.                                                                                                            halved.                             experience that I’m seeing is          capital,” he says.                             “The important thing is              have is that it allows you to
                                                  Last month, ipac seeded the US-                                                              just mainstream…                                    Sovereign’s Ray King says      that members don’t change                  The ideal allocation to al-           to educate and really manage              have that conversation in the
                                              based hedge fund-of-funds, Prisma                                                                                                               there has never evidence of a       funds at the drop of a hat.            ternatives for the end-investor           clients’ expectations around              first place.”
                                              Global Multi-Strategy Fund, with                                                                 Why is property                                ‘run’ on any Australian super       COF isn’t a watershed for the          will of course change according           alternative investments,” Rog-
                                              $160 million. It was the first fruits of its                                                                                                     fund, and that CIOs should          industry,” he says.                    to their age and circumstances,           ers says.
 Jeff Rogers ...
 agonising over whether life settlements is
                                              relationship with specialist alternatives       Mark Sainsbury ...                               development considered                         not allow over-cautiousness to
 alternative alpha or beta                    placement agency, Brookvine.                    weighing alternatives                                                                           cost their funds the illiquidity
                                                  By short-selling the beta exposures                                                          ‘alternative’?”                                premium, which depending on
would also be classifiable as ‘alternative’.                                                 aimed at maximising 20-year returns,                                                              the asset class he calculates can
     JANA’s Ian Patrick suggests another      The investment team                           JANA’s Ian Patrick agrees there is                     HOW MUCH?                                  be worth between 0.5 and 3
‘alternative’ approach to long-only equity                                                  a place for hedge fund-of-funds to                      If it was not for Mark Sainsbury, the     per cent a year.
investment might be where a consortia         behind Colonial First                         “provide some liquidity and flexibility in          chief investment officer of NSW-based                 However, he acknowl-
of like-minded institutional investors,                                                     case new opportunities arose”, but not a           First State Super, the answer to ‘how          edges liquidity would come
“who weren’t afraid to be business own-
                                              State’s Firstchoice                           significant allocation because they “fail           much alternatives should a super fund          into focus under a number of
ers”, could take a majority position in a                                                   the fee test”.                                     have?’ would be as vague as the attempts       more likely scenarios, such as
poorly managed, fundamentally sound
                                              master trust are                                   Patrick believes the potential                to define what they are in the first place.      the need to rebalance strategic
listed company, and run it on a genuine                                                     universe of alternatives should be broad                Asked for the optimum level of            asset allocation (SAA) if listed
                                              understood to have been                       enough to exploit global themes, par-              exposure that the average fund should          equities severely underper-
20-year vision.
                                                                                                                                               invest in unlisted or less liquid alterna-     formed, or adjust for mem-
     This approach could be a good way        calling on many of their                      ticularly around changing demographics
                                                                                                                                               tives, Sainsbury counsels “no more than
of combining a long-term horizon with                                                       and globalisation, which to his mind                                                              bers retreating to investment
an “ongoing, third-party derived valua-       underlying managers,                          means “private equity and property in              15 per cent of the total fund, with un-        choices with lower allocations
tion” - that supplied by the 30 per cent                                                    emerging markets”.                                 listed property added into the illiquids       to alternatives.
free-float listed component – according        asking them how they                               Agricultural investments are                  weighting”.                                         In the unlikely event of a
to Lachlan Douglas, a director at private                                                   attractive as governments in develop-                   Sainsbury says that the liability         quick and sharp decline in fund
equity placement agency Principle             would liquidate 25 per                        ing nations seek to secure future food             profile of the fund is the wrong thing          assets, King recommends that
Advisory Services.                                                                          supplies.                                          for a CIO to be considering when he or         funds, among other things,
     Maintaining a daily market               cent of their portfolios                           “Prime farming land in Zimbabwe               she is determining an allocation to less       allow the alternatives allocation
valuation would help tackle a problem                                                       is the ultimate value play at the mo-              liquid alternatives.                           to increase to the upper band
common to many less liquid alterna-           if asked to do so within                      ment, if I can make a tongue-in-cheek                   “It’s not the length of the liability     of the SAA range.
tive asset classes, whereby managers are                                                    comment.”                                          profile, it’s the length of the liquidity            “If the SAA to alternatives
tempted early on in the life of a fund to
                                              a three-month period                               Asian currencies are another                  profile. Super funds are like banks, we         is 15 per cent, then a reduction                  WE DON’T BELIEVE IN
                                                                                                                                               ‘borrow short/lend long’ but super             of 25 per cent in total fund size
over-emphasise positive aspects of their
holdings to third-party valuers – who as      of underlying managers, the Prisma                                                               funds do not have the fall back of a           would increase the alternatives
                                                                                                                                                                                                                                                A R M C H A I R A N A LY S T S .
Douglas says “can rely to a great extent      fund-of-funds aims to have low cor-                                                              lender of last resort facility if there is a   allocation to 20 per cent. This
on what they are told by management”          relations to equities, be as volatile as                                                         liquidity squeeze. APRA is quite right         is a conservative level for the
                                                                                                                                                                                                                                                                                  At Janus, we believe in examining a company from the inside out.
- in order to bring forward payment of        bonds and deliver similar returns to                                                             to be concerned,” he says.                     upper band of the allocation,”
                                                                                                                                                    “Super funds have an obligation to                                                                                            So, we consistently go the extra mile to experience first hand how a
their performance fees.                       those earned by equities. It has recently                                                                                                       King believes.
     The possibility of including long-       invested in fixed income, volatility ar-                                                          meet member roll-out requests, which                Depending on the severity                                                      business operates – before we invest. It’s that sort of diligence that
only equity investments in an ‘alternative    bitrage and distressed credit strategies,                                                        means they must be able to cope with a         of the run, or shift away from                                                      we think sets us apart. And it’s what we believe gives our clients that
markets’ fund is not the only foreign         and in the past year sought managers                                                             30 day liquidity requirement, irrespec-        riskier investment choices,
                                                                                                                                                                                                                                                                                  extra edge. For more information on Janus’ research approach and
ground being trod by the ipac invest-         who were short subprime securities and                                                           tive of the length of working life of indi-    King says funds could redeem
                                                                                                                                               vidual members. This misunderstand-                                                                                                US and global investment strategies please contact John Landau on
ment team. Jeff Rogers and his col-            financial companies.                                                                                                                             assets where permitted, take
leagues have also been “agonising” over           While ipac’s “alternative markets”                                                           ing of the fundamental business task           periodic distributions from                                                         03 9653 7488 or by email at john.landau@janus.com.
where to put an intended exposure to          bucket will broadly be characterised by                                                          of superannuation is why some of the           their alternatives managers
                                                                                              Ray King ...
life settlement funds – which purchase        underlying economic exposures and be            monitor illiquidity, but not at expense of its
                                                                                                                                               more illiquid funds arguably could not         rather than reinvest, impose
                                                                                              premium
life insurance policies from people who       more suitable for end-clients who are in                                                         meet reasonable solvency standards.”           a freeze on any new commit-
are typically over 65, and typically are      the accumulation stage, Rogers says that                                                              Sainsbury is hardly the only asset        ments to alternatives, sell on
expected to die in less than 10 years.        alternative alpha is risk-reducing and                                                           allocator concerned by illiquidity at the      the secondaries markets where
     The manager skill involved in            more suited to decumulators.                  favoured alternatives play, given the              moment.                                        viable and sensibly priced, and
selecting the most lucrative underlying           “The anchor is a well-diversified          upward revaluation “that one anticipates                The investment team behind Colo-          even purchase options to put
policies would seem to make life settle-      hedge fund-of-funds with strong risk          is inevitable”, with the position achieved         nial First State’s Firstchoice master trust    securities to various counter-
ments a candidate for ipac’s “alternative     management, but any manager who               through a combination of assets domi-              are understood to have been calling on         parties at pre-specified valua-
                                                                                                                                               many of their underlying managers,                                                                Distributed in Australia by Janus Capital Asia Limited (ARBN 122 997 317), which is incorporated in Hong Kong, is exempt from the
alpha” bucket, but Rogers says there is       can demonstrate repeatable skill to us        ciled in the region and a “raw currency                                                           tions (King warns this could be                    requirement to hold an Australian financial services licence and is regulated by the Securities and Futures Commission of Hong Kong
an argument for the funds containing          belongs in there too,” Rogers says.           play”.                                             asking them how they would go about            expensive).                                        under Hong Kong laws which differ from Australian laws.

a “demographic-driven insurance beta”             Asked to think about his ultimate                                                            liquidating 25 per cent of the value of             Access’ David Chessell,                       JS-0108(06) 0608 Aust Press
                                              unconstrained alternatives portfolio                                                             their portfolios if asked to do so within      whose clients are well known