Mark Pearce 
With interest rates likely to head north and stock markets near fair value or above, coupled with a global shortage of yield investments, what does an advisor tell clients? A group of Australian researchers recently discussed their asset allocation options.
On the Rainmaker ‘Best of Breed’ tour to London last month, the big global fixed income manager GAM participated in a luncheon discussion with 12 prominent analysts from Australian research houses and dealer groups. (See the attendee list at the foot of this report.)
There were many common concerns and a few opportunities discussed. The most popular and perhaps biggest opportunity seemed to be in the alternatives space.
For most present, the build up of cash exposures by clients had been going on for some time, reflecting investor uncertainty and lack of yield on offer.
Given their retail-oriented client base the early signs of cracks in the residential housing boom in Sydney and Melbourne impacting on SMSF investors in particular was another major concern. Several expressed frustration that clients were still insufficiently diversified despite the best efforts of advisors.
Lukasz de Pourbaix, from Lonsec, said most of his firm’s clients were looking more closely at alternatives because of equity and bond prices, but they were, meanwhile, building up their cash positions. Recent volatility, prompted by the big correction in the Chinese market, added to concerns about how to position their portfolio, he said.
Mark Pearce, GAM’s fixed income product specialist, said that Australian investors remained underweight to emerging markets when they should not be, on a long-term basis.
“It’s always quite surprising to us,” he said, “and despite the recent flight of capital, we think Australians should be overweight emerging markets in the long haul.”
GAM is a little bearish on the Aussie dollar, believing that about 65c versus the greenback is fair value.
(GAM’s Mark Pearce and head of structured investments, Rossen Djounov, are hosting advisor breakfasts in Sydney and Melbourne this week and a roundtable lunch in Sydney next week covering similar asset allocation themes.)
Brendan Irwin, from Mercer, said: “There’s a lot of confusion out there. We see a lot of clients rolling off term deposits and they’re not getting much elsewhere. We’ve tried to introduce ‘alts’ [alternatives] into the retail thinking… but I think many advisors have some bad memories absolute absolute return funds from the past. We’re not sure why that’s persisting.”
As fixed income strategies move out along the risk spectrum, due to investors’ search for yield, they are also taking on some equity-like characteristics. In some instances, Pearce said, managers were also including small allocations to high-dividend equities in their diversified fixed interest funds.”
He was suspicious, though, of the popularity of multi-asset funds, which he thought might be fashionable in the current environment but not all managers had demonstrated a lot of skill with that style.
The challenge for active fixed interest managers which offered absolute returns funds in the current environment, Pearce said, was that credit spreads would likely widen again and investors would be looking to primarily “harvest the credit beta”. He said investors needed to be very wary as the credit cycle turned.
“One of our biggest concerns,” he said, “is with the emerging markets corporate sector. There have been a lot of issuants and some big ones have crept into the indices. The liquidity in some of them is questionable.”
He added that a lot of the issuances were being marketed by finance companies which were “brass plate companies with no assets”. If something went wrong, the investors would be left with nothing.
GAM’s absolute return fixed income fund has proved particularly popular with Australian institutional investors in the past two years, having raised about A$2 billion in locally sourced funding in that time. At the retail level GAM has also raised funds through the Lonsec model portfolio.
The researchers who attended the Best of Breed tour were: Marie McLaren of BT Financial Group; Jason Coggins of Koda Capital; Brendan Irwin of Mercer; Tom Whitelaw of Morningstar; Amelia Kelly of ANZ Wealth; Damian Cilmi of Bendigo Wealth; Hamish Bell of ClearView Wealth; Lukasz de Pourbaix of Lonsec; Shane Brereton of Commonwealth Bank; Luke Mandekic of AMP; Dragana Timotijevic of Select IP; and, Tracy Abercomby of IOOF.