(pictured: Daniel Sheard)
There is an increasing disconnect between the strategies adopted by the wealth management industry, and its clients, and those of the institutional part of the industry. Absolute returns strategies are a case in point, a roundtable of wealth management researchers and advisors was told last week.
Institutional investors have, in the past few years post the global financial crisis, largely moved away from market-beta strategies and towards higher-alpha strategies, according to Daniel Sheard, who runs the big absolute return bond portfolio for GAM, based in the UK.
Sheard, an investment director of GAM and long-time fixed income manager, addressed a series of events for Australian clients last week, including a roundtable in Sydney at which the pros and cons of benchmark-agnostic strategies, such as the GAM Absolute Return Bond Strategy, were discussed.
GAM manages about $2 billion in the strategy for Australian institutional investors and about $150 million for local retail investors.
“Money has generally been leaving the fixed income universe in the retail sector in the past few years,” Sheard said. “There is an increasing divergence between institutional and retail.”
For Australian investors, though, bank term deposits and bank hybrid investment products have proved popular. Sheard questioned whether investors understood the risks associated with the bank hybrids.
“In Australia there is a concentrated banking sector and when you have those banks issuing [hybrid] securities to their own clients, it seems like you are doubling up on the risk,” he said.
Jonathan Ramsay, director of research firm InvestSense, observed that there was a proliferation of diversified bond funds over a long period and that, in the past two years at least, a number of new absolute returns bond funds available to Australian investors.
“Absolute return [bond] funds are a natural response to the problems we hade around the GFC,” he said.
Sheard agreed that there were a lot of attractive alternatives to traditional bond funds, including other asset classes such as residential property in some countries, such as Germany. And he understood, he said, why Australian bank hybrids were popular with investors.
He also said there were a lot of opportunities for managers in the fixed income space. “We’re value investors and we can see value in various places,” he said.
One of GAM’s current themes is the China transition story, moving towards a more urban local demand-driven service-orientated economy rather than one dependent on manufacturing exports.
“The Chinese economy has been distorted for the last 20 years,” Sheard said. “It’s now transitioning to a more normal structure. One of my colleagues, Amy Kam, who runs our Asian credit strategy, is of the view that China is progressing much faster in its transition than most westerners think. A lot of people think [China] it’s heading for a sub-prime-type banking crash. We don’t. Unlike the US sub-prime situation, Chinese credit growth has been provided only by Chinese institutions. And China is still a command economy. The primary risk we see is actually the possibility of social unrest if certain savings products are allowed to fail.”
Notwithstanding their support for alpha-generating strategies, which Sheard naturally applauded, he said that Australian institutional investors should own more emerging markets investments, given that they fitted with the long-term investment horizons of most super funds.
He did applaud, however, the tenacity with which Australian funds tended to get managers to lower their fees. “I think fees, generally, are still too high,” he said. “The marginal cost to a manager of a new mandate is next to nothing… I like the idea of managers being paid a base to cover their overheads and a performance fee. But that’s my personal view.”
