Like the Reserve Bank, ASIC is keenly aware that the rise of private markets, and especially private equity, creates both “upside and downside risks” to an efficient and fair economy. But it’s ASIC that sits in the first line of defence, and its new cohort of commissioners are determined to keep this burgeoning market clean.
Alternative fund manager Alceon and advice group Findex reflect on the genesis of Alceon’s Australian Property Fund, and why a finite number of key partnerships is better than mass market capital.
The burden of outperformance
January fund manager returns are beginning to creep in, and it doesn’t look pretty. The Nasdaq finished as much as 9 per cent lower, with the S&P500 and Dow Jones down more than 5 and 3 per cent respectively. The dispersion of fund manager returns continues to grow, with the worst down as much as 30 per cent in the month alone, and the best staying just above water.
Interestingly, the most difficult month since the pandemic began is coinciding with the release of 2021 annual performance updates. Putting aside the fact that most of these results are now five weeks out of date, it provides a unique insight into the challenges facing investors and advisers alike.
Consider for instance the fact that the $200 billion Future Fund just delivered its largest return in history, a stunning 19 per cent for the 2021 calendar year. This is clearly a great result, for the stakeholders to the fund, being nearly triple the CPI + 4 to 5 per cent objective.
Interestingly, the fund was only a few years ago suggesting that their objective return was becoming too difficult to achieve. Management is once again warning of “lower returns in the future” expecting supportive monetary policy “will have to come to an end” with the market adjustment to be significant.
The big question here, and this isn’t targeted directly at the Future Fund, is how much risk is being taken to deliver on said returns and are they true to label. For instance, if you are employing a fund manager to deliver returns that exceed the S&P/ASX200 buy 3 per cent, but they outperform by 12, is this something you should be concerned about.
Are you comfortable that this manager is taking an appropriate amount of risk, or are they pushing the limits too much and potentially exposing your client’s capital on the downside?
2021 may well have been the ‘year of the crow’ with active managers riding high on a boom of alpha generation in the most bullish markets in recent memory. But a closer look in many cases, showed a smaller and smaller cohort of investments driving said returns, something that has been exposed in January and may become the theme of 2022.
Price and earnings momentum have been the most powerful drivers of returns in recent years, creating a new FOMO environment of themselves. That is, investors were naturally contacting their advisers to be in last year’s winners, such is our behavioural bias. Yet when the tide goes out even slightly, as it did in January, measures like downside capture, active share, tracking error and attribution become more important than ever.
By no means is this a suggestion that these strategies are wrong, rather the key is ensuring they remain true to label. Advisers recommending high conviction strategies will likely be well aware of the volatility that comes with this approach, but those in ‘diversified’ options less so.
