by Greg Bright
With a big question mark over both equities and bonds because of their valuations, institutional investors have been seeking, for some time, to further diversify their portfolios with uncorrelated assets. Increasingly, they are combining several trends to use risk premia strategies to meet this aim.
At an investor roundtable in Melbourne last week, Mike Aked, the head of asset allocation for Research Affiliates in the US, said that the reason systematic investing works, such as the exploitation of permanent – or at least very long term – risk premia, is that “we are our own worst enemies”.
Aked said: “Every day that you allow a subjective overlay to a proven systematic process is a day that you are unwinding the alpha generated from that process.”
To put it another way, Professor Ron Bird, a former fund manager who returned to academia and is linked to UTS (the University of Technology, Sydney), has said in the past words to the effect: “Fund managers are paid too much. If they were paid less, they wouldn’t feel the need to ‘tinker’.” Tinkering, for subjective or fundamental reasons, tends to reduce, rather than add to, value.
Last week’s roundtable, which had 13 big super fund and multi-manager investors and their advisors in the room, was organised by Parametric, who included their research partner, Research Affiliates, in the discussion. The two companies have had a close relationship since 2009, with Research Affiliates’ strategies being implemented in many cases by Parametric. Parametric has almost A$10 billion in Australian-sourced money across a range of strategies and solutions. The roundtable was produced under the ‘Chatham Hose Rule’, whereby participants can say their piece but what is said is not attributed to anyone in particular.
And here’s a scoop delivered at the roundtable: Mike Aked, an Australian, has returned to Australia after a long stint overseas with Research Affiliates, to open the Australian office for the firm, based in Victoria. This happened, quietly, only about three weeks ago.
Chris Briant, the head of Australia and New Zealand for Parametric, said that with Research Affiliates opening an office here, investors would benefit from the (physically) closer association, as well as an obvious greater commitment to this market.
“It also allows us to have more meaningful and more regular conversations with investors about the Parametric/Research Affiliates Systematic strategy,” he said. “And it shows everyone how an investment manager with implementation expertise, like Parametric, can combine with other firms to provide enhanced outcomes for funds and their members.”
Prior to joining Research Affiliates Aked was managing director of the University of Virginia Investment Management Company. Before that he was at Sunsuper.
For his part in the union, Aked said that he wanted to make the risk premia multi-asset strategy, which was launched in the US in May of last year and has now been offered to Australian investors by Parametric, the “number one” priority for his firm in terms of new business. He predicted it could become the “new smart beta”.
While the strategy, which competes with more opaque – and generally more expensive – traditional hedge funds, aims for a return of about 7-9 per cent over the cash rate, the first full-year return for investors was just over 20 per cent. Volatility is expected to range between 10-12 per cent, but Aked says it is a “specific” type of volatility, which is more readily controlled and accepted by investors. The strategy promotes its transparency, low cost and consistent risk/return deliveries. It doesn’t target volatility levels per se and doesn’t trade off the return between different factors. The strategy ‘auto-scales’ in terms of total exposure, based on the size of opportunities in the market at any one time.
For the uninitiated, the founder of Research Affiliates, Rob Arnott, is usually considered the “godfather of smart beta”. If you ‘Google’ his name, that’s what you come up with. Whether or not he invented the strategy, it looks like he certainly invented the name. He started the firm in 2002 and came up with the ‘RAFI’ fundamental index, which has combined systematically delivered fundamental views with index-like transparent and inexpensive processes. As the roundtable was told, though, research is an evolutionary and never-ending process. Systematic – or quantitative – strategies will continue to evolve and improve alongside the developments in markets. Aked believes that a key is to partner with other organisations which have the same long-term interests.
Tom Lee, managing director of investment strategy and research for Parametric in the US, told the roundtable that the multi-asset systematic strategy evolved through conversations with friends in the US. One, in particular, Research Affiliates, spoke to him about their early work on a strategy to deliver hedge-fund-like aspirations with transparency and lower fees. Lee said that after the first conversation, and a hiatus of about eight months, there ensued a constant dialogue for the next 18 months or so, culminating in the strategy being offered in Australia today.
It was launched in the US in May, 2017, and delivered a 20 per cent return in its first year.
“Transparency was one of the main aims for us, as well as a low correlation with traditional assets and generally lower costs for our clients,” he said. “Our DNA at Parametric is to implement strategies in the most cost-efficient manner possible. With this strategy, we have a universe of 55 securities but 45 of them are futures contracts. So, it’s very liquid.”
He said: “Nobody is excited by the near-term future for equities or bonds. There is a big dispersion between the products being offered in the market… A lot of people are including more risk premia strategies in what they do, including tactical decisions. But they need to look closely at what the particular strategies or managers are offering.”
Raewyn Williams, the Sydney-based managing director of research at Parametric, said the “power” with a systematic strategy was knowing, every day, what was happening in the portfolio. She said that Parametric had been a long-term partner with Research Affiliates for almost 10 years and wanted to encourage super funds into similar long-term partnerships.
“Super funds are long-term investors,” she said. “And even though there is a lot of short-term pressure on them, such as peer comparisons, we’d like to try to help them stay the course for their long-term goals in terms of their investment strategies. The beauty of this strategy is that it is helps on both the upside but, more importantly, on the downside.”
But, as one senior analyst for a big super fund questioned: managing beta and enhancing it is a complex thing. “It’s more than just about tilting,” he said.
With respect to where a risk premia absolute return strategy can fit within in a portfolio proved an interesting question to pose to the roundtable. One investor suggested it would be inside his “defensive alternatives” portfolio. A consultant said: “Well, that would be interesting to find the person who runs that bit.” Another investor believed they should be classified as “hedge funds” in their own category.
Coincidentally, Raphael Arndt, the CIO for the Future Fund, delivered a presentation at the top-line i3 (Investment Innovation Institute) conference on the outskirts of Melbourne the week before. At that conference he indicated that what the Future Fund refers to as ‘hedge funds’ can deliver important defensive strategies in the current environment.
The Future Fund is Australia’s largest investor in alternative assets, as well as being Australia’s largest fiduciary investor. It has about A$22 billion, or 15 per cent of its total portfolios, across what it calls ‘hedge funds’. The point here is that of its three categories of hedge funds, one is “alternative risk premia”. Arndt says these sorts of funds are like “hedge funds 2.0”.
Research Affiliates spoke to various research papers on the day.
They include:
https://www.researchaffiliates.com/documents/655-When-Value-Goes-Global.pdf
https://www.researchaffiliates.com/documents/563-systematic-global-macro-final.pdf
Investor attendees and their advisors at the roundtable included: Frank Russo (CARE Super), Paul Newfield (Willis Towers Watson), Iain North (JANA), Steve Merlicek (IOOF investment committee), Dan Farmer (IOOF), Christina Liosis (advisor), Adam Karaelis (Vision Super), Josh Bay (Sunsuper), Marcus Nelson (Frontier Advisors), James Harman (HESTA), Troy Rieck (EquipSuper), Marc Hollenstein (Atchison Consultants) and Patrick Liddy (MSI Group).
Other attendees were: Mike Aked (Research Affiliates) and, from Parametric, Tom Lee, Chris Briant, Raewyn Williams and Sheela Veerappan.
