Retirement products and strategies have proliferated in recent years, targeting everyone from big super funds, their members through investment options, wholesale investors through planners and retail investors through their SMSFs. They come in all shapes and sizes, though, and some key differences deserve examination.
Pentalpha Investment Management, one of the new players in the space, had the benefits of years of experience in the industry generally and the opportunity to study how other managers and big investors have approached the task. They all have the same aim: to protect a retiree’s capital while continuing to provide a reasonable return.
Pentalpha’s ‘Income for Life’ fund was launched into what the manager calls “a perfect storm” in July 2017, with the banks, followed by the insurers, starting to feel the effects from various scandals. The storm only got worse subsequently with the revelations from the Hayne Royal Commission. Their shares, long sought by dividend-conscious retirees, have tanked.
Pentalpha’s style, which targets a total long-term return of 8 per cent, including a target of 6 per cent franked dividend income, is to hold between 10-20 top 200 ASX stocks. It currently has 14, of which four are banks – Westpac, Bendigo, NAB and Bank of Queensland – and three insurers – Suncorp, IAG and Medibank. The portfolio actually contains 33 parcels of those shares, with different starting prices and different tax management requirements.
This is where the firm’s experience comes to the fore. The founders, Denis Donohue and Ewan Macleod, are no spring chickens. They both worked together at Suncorp for more than 20 years from the mid 1980s, until 2007 when Donohue left to set up his first boutique, Solaris Investment Management.
Suncorp, Donohue says, was a very tax-efficient manager and also one which had to be conservative to protect the insurer’s fiduciary asset pool. It’s where he learned the ins and outs of exchange-traded options (ETOs), which Pentalpha uses for the bulk of its protection, delivered at the individual stock level rather than an overlay across the portfolio
“Hedging against the index for portfolio protection is useless,” Donohue says. “Look at last [financial] year. The banks were down 20-30 per cent but the [ASX 200] index went up [8 per cent].” Pentalpha estimates that the loss avoided through its hedges has run at 2.41 per cent on a capital-weighted basis.
Donohue, who is managing director and head of investments, and his old boss Macleod sit on opposite sides of the same desk at the Brisbane office. Donohue was put under Macleod’s wing when he left Coopers & Lybrand and joined Suncorp. Macleod ran the balanced fund at the time.
By the time Donohue had left Suncorp in 2007, following the sale of its investment arm to Tyndall, he was the head of equities, a position, he says, he would happily have continued in for the rest of his career.
At Solaris, which joined the Pinnacle multi-affiliate stable, Donohue saw the funds under management rise to about $5 billion in traditional benchmarked Australian equities and wanted to diversify the range of strategies. He had already had some product diversity in place, with one of the first ‘no fee’ (performance fees only) fund, but the other shareholders did not want to go down that path.
“By 2012 there was a lot of fee compression and you could see that biting. Our competitors were index funds and, in some cases, our own clients due to their investment insourcing,” he says. “I thought it was easier for me to step out and do a new product myself… I then had a year off, because of my non-compete clause.” The new company was incorporated in February 2015 and granted an AFSL in July that year.
Macleod heads up the stock research and Donohue the portfolio construction, but they second guess each other’s work and back up each other’s views. Having worked together for so long makes it a seamless process.
Looking at a cohort of 11 other managers with products and strategies which have a similar goal of downside protection with reasonable returns, the firm points to several differences between Pentalpha’s ‘Income for Life’ and a number of the others. These include:
. total or absolute return target – a lot of equity income funds still benchmark themselves to the ASX 300 for their dividend yield, plus some capital growth.
- Pentalpha tends to have a significantly lower volatility – 3-4 per cent – with a beta of 0.3 to 0.4.
- Pentalpha has lower turnover for its portfolio. It’s put and call options are on capital account only.
- Pentalpha aims to limit the capital downside to a mid-single digit percentage. The protection is in place all the time and the expected fully franked dividend yield is expected, as a minimum, to offset any capped capital downside.
- Pentalpha does not sell calls and then buy them back or the opposite for puts in the ordinary course of managing the portfolio.
James Jarvis, the head of distribution, said the ‘Income for Life’ fund was added to the Macquarie Wrap last week. Other platforms include: HUB24, Netwealth, OneVue, PowerWrap and Mason Stevens. He said that it was expected to receive a Lonsec rating in March.