Caroline Cai from Pzena Investment Management speaks to The Inside Network’s James Dunn for our IN60 series. The Inside Adviser
The historic outperformance of big tech stocks in the US may look like a global outlier, but many developed markets (including ours) have high levels of concentration risk. That may not be the case for long, with a likely softening interest rate environment set to re-order indexes around the world.
Alternatives at the centre of Lucerne’s success
Heading into uncharted territory, Lucerne Investment Partners CEO Anthony Murphy used the global pandemic as an opportunity to get in-front of the market with a unique offering. Something no one else had. And it’s paid off.
Since our days at Ord Minnett, it had been a while since Murphy and I had touched base, but just like our broking days, his investment style has narrowed-in on identifying the big themes while being nimble enough to capture the upside.
“The best way to think about Lucerne is as an investment group with a private offering but fundamentally we consider everything from an investor’s perspective. We invest (Lucerne staff), my family invests, our balance sheet invests and then clients can select how they wish to engage Lucerne. And that brings in the second part of the business, which is funds management,” says Murphy.
His flagship fund is the Lucerne Alternative Investments Fund (LAIF), which is a fund-of-funds product launched in December 2017. LAIF allocates capital to funds, often with a bias to new emerging managers that more often than not do extremely well when they’re unknown, small and nimble; examples are Bronte Capital, Apollo Capital in digital assets and QVG. Lucerne is often the largest institutional investors in these funds and is often the first.
“We were the first institutional investor with QVG long-short, first with Apollo, first with Perennial Global Resources and first with Pure Asset Management, which has done really well and that’s represented in quality risk-adjusted returns for our investors,” says Murphy.
Just like in his broking days, Murphy found that trying to run a model portfolio for clients had its limitations.
“LAIF allowed us to put a robust offering around the fund selection process with a bias to alternative investments.. We’ve got private equity, long-short equities, digital assets, long-short US healthcare. These themes can be unfamiliar or not accessible to many Australians and we wanted to create this product for all investors, both retail and wholesale.”
And yes, there are other fund-of-fund products out there but for the most part, they tend to favour traditional Australian-based funds.
As the vaccination rates rise and we slowly emerge into a post-pandemic world, Murphy isn’t so optimistic on the market outlook and is generally concerned that the final stages of a historic bull run are being played-out. And Murphy is again, ahead of the pack.
“The way we’re looking at the market is, rates are at zero and equities have rallied hard supported by stimulus, so the challenge then becomes how to position portfolios going forward. Most investors think, what they’ve done for the last ten years, they can do again. We don’t think that’s the case. Equities could deliver flat returns for the next five years – so, how does one derive returns in such an environment?”
And what Murphy is saying makes sense. Investors were hoping inflation was transitory but looking at it now, it may not be. Whispers of the word ‘stagflation’ have even been doing the rounds in the press.
“How do you make money when cash and bonds are zero and producing negative real returns with inflation. That’s where it becomes critical to consider emerging market themes and owning them correctly. LAIF can even generate returns through the underlying portfolio through strategies that aren’t correlated with the market. So, for example, if the market crashes, for example, selected volatility managers can deliver strong returns in a short period.”
Advisers need to think differently. The reality is that technology and platforms have come a long way in making investing in traditional markets simple and easy. If you want to add value, you need to introduce a strategy or product that can still provide quality risk-adjusted returns and complement traditional investments. Investments including private debt, agriculture, and private equity should also be considered as part of a broader portfolio, and remaining nimble in these asset classes is of the utmost importance.
“If you were long resources and iron ore last year, you would have done extremely well. But if you had just held that position, you would have seen BHP retrace back to its 2019 levels. You need to be able to move quickly. That’s why a lot of the bigger managers have underperformed recently because they’re too big. Hence why we look for those nimble managers of capital,” says Murphy.
His best advice to advisers is to look at what investment strategies will work going forward and follow the smart money; which, at the moment, seems to have moved towards private assets, where there are still many mispriced opportunities.
A highlight of LAIF’s performance has been from digital assets and cryptocurrency. While Murphy started off as a cryptocurrency skeptic, his view of digital assets changed as the big institutions started to pay attention. JP Morgan and BlackRock began to set up digital asset platforms and trading desks, so LAIF decided to reconsider this space.
Following on with the ‘get in early’ strategy, Lucerne identified Apollo Capital and made a very small allocation to its original fund, becoming the first institutional investor. Lucerne started off with a 1 per cent position in the portfolio, increased it to 3 per cent and then grew it organically to 11 per cent in LAIF. In March this year, the cryptocurrency market was getting a little euphoric, which was a signal to “take a little off the table and re-assess.”
Apollo Capital was one of the country’s best performing crypto funds and effectively the country’s leading crypto-asset investment firm. Apollo was one of the largest contributor to LAIF’s performance. Now the challenge for Murphy and his team at Lucerne is to identify the next emerging themes in the market and partner investor capital with them.
When asked where the market might be this time next year, Murphy replied, “We could conceivably see a possible 10-15 per cent correction through mean reversion as investors start to take risk off. People are banking-on company earnings surprising on the upside. I don’t think they will. Governments will start to taper, and that should see a rotation down in equities. I’d say 6500 points on the S&P/ASX 200 Index in 12 months from now is quite possible.”
When asked to sum up Lucerne in a few words, Murphy finishes off with, “We’re early and we’re different. We identify themes before the market does and assign those themes to the best investment specialist in that space.”
