Investing in alternatives under a total portfolio approach is very different than when building a standalone alternative portfolio, Tammi Fisher says.
In September 2021, the Future Fund declared that the world as we knew it then had fundamentally changed.
It wasn’t just the COVID-19 pandemic that caused these changes, although it certainly played an important role, but several macroeconomic and geopolitical drivers, including deglobalisation, inflation and increased political tensions, had changed the rules of the game.
Institutional investors would do well to adjust their strategies to be more active, more skill based and more flexible, the fund said.
The Future Fund’s allocation to alternative assets at that time stood at 13.4 per cent of the overall portfolio.
Fast forward 18 months and the allocation to alternatives has increased to 17.1 per cent of the total fund, as at the end of March this year.
You would be forgiven to think that a new strategic asset allocation had been set to cater to the new environment, in which alternatives were given a higher weighting.
But this is not how the Future Fund operates.
Under its version of the total portfolio approach (TPA), or ‘joined-up investment approach’ as the fund calls it, investments are made in a way that reflects the best expression of an idea.
In addition to opportunities in each sector, we consider the top-down views that we're trying to express in the portfolio. And it may be that we implement a view in alternatives, it may be that we implement it through equities, or it may be that we do it through credit. But we definitely don't set out to try and fill a budget
“We don’t have defined sector allocations,” Tammi Fisher, Head of Alternatives at the Future Fund, says in an interview with [i3] Insights.
“None of us start the year with a fixed capital allocation or a fixed share of the portfolio. It really is about what the best opportunity is to allocate our capital in order to generate long-term returns, given the current investment environment.
“In addition to opportunities in each sector, we consider the top-down views that we’re trying to express in the portfolio. And it may be that we implement a view in alternatives, it may be that we implement it through equities, or it may be that we do it through credit. But we definitely don’t set out to try and fill a budget.
“So I couldn’t even give a specific outlook for where alternatives might be next year,” she says.
Inflation is a key example. There are different ways to protect a portfolio against longer term, more persistent inflation, and inflation hedges can be implemented in different parts of the portfolio.
‘In that environment, as an example, we may want to hold some more commodities’,” she says. “We can hold that in a passive, direct way through our overlays team, or we can hold that all the way on the other end of the spectrum in a more alpha-focused way in the alternatives portfolio.
“And so, we will all genuinely put our heads together, across sectors, across teams, and ask: ‘What are we trying to express? What is something bringing to the portfolio? What is it adding to the total portfolio?’,” she says.
This approach to investing also means that the type of alternative strategies Fisher includes in the portfolio are often strategies that have little overlap with other assets in the portfolio and are sized according to the desired effect on the overall holdings.
“In hedge funds, for example, there are strategies, including higher beta equity long/short strategies, which are often a core allocation in other hedge fund portfolios.
“You’re less likely to see a large weighting to those in our portfolio,” she says.
Exposure to beta is better taken in equities because it allows the fund to express it in a more liquid and lower cost way.
In private equity, the fund tends to be more skewed to venture capital and growth strategies and less to buyout strategies, compared to traditional standalone portfolios.
Fisher gives another example that illustrates the approach from a meeting the day before the interview. Although she didn’t reveal the specific opportunity they were debating, she does show how the problem was tackled.
“We had a meeting yesterday and were debating the best way we could express a potential opportunity. We had representation in the room from Equities, DAA, Overlays, Strategic Opportunities and Integration and Alternatives. We considered the multiple ways to express the opportunity, what the risks were, and how we should be sizing it. And that debate happens all the time.
“That’s really how we’re looking to put a portfolio together: each of us thinks of the role an investment plays within the total portfolio. We don’t ever think about our portfolios on a standalone basis; they would look very different,” she says.
Opportunities in Alternatives
Although the Future Fund doesn’t have a target to raise its exposure to alternatives, chances are they will become a larger part of the total portfolio, as the current environment provides a lot more opportunities for these strategies to add alpha.
In a world where equities go up almost in a straight line, hedge funds may struggle to achieve significant outperformance. But this is no longer the case, Fisher says.
“A lot of the tailwinds from the last few decades, underpinned by globalisation, are reversing. The post-GFC years were actually a relatively benign environment given the extent of stimulatory policy, with a somewhat monochromatic developed market approach to politics, geopolitics, macroeconomic decisions, fiscal policy, monetary policy. And so you just didn’t see as much dispersion in rates, in policy decisions, in volatility” she says.
“So there were just a lot less interesting alpha-generation opportunities for our macro strategies.
“But the current environment is the complete opposite of that. Last financial year, in 2022, when equities were down 14 per cent, hedge funds were up in a meaningful way. And that’s really when we see the benefits of its diversifying characteristics,” she says.
Fisher sees opportunities, not just in a handful of niche strategies, but across the spectrum of hedge fund flavours.
A lot of the tailwinds from the last few decades, underpinned by globalisation, are reversing. The post-GFC years were actually a relatively benign environment given the extent of stimulatory policy, with a somewhat monochromatic developed market approach to politics, geopolitics, macroeconomic decisions, fiscal policy, monetary policy. So there were just a lot less interesting alpha-generation opportunities for our macro strategies
“There are a lot of global macro strategies that are interesting. There are fixed income relative value strategies that are interesting. Trend following for sure is interesting. A lot of quant strategies we’re finding really interesting. We place a lot of value on active alpha. And so it’s a great time for alternatives,” she says.
But it is not just alternative strategies that provide interesting opportunities at the moment, similar developments can be seen in credit, infrastructure and property, Fisher says.
“Every single investment committee meeting that we go into there is genuine tension for capital, which is exactly what you want to see. That is a sign of a healthy investment committee.
“It is the opportunity set that we’re seeing across so many different parts of the portfolio that will be our constraint, rather than a fixed limit for alternative assets,” she says.
Liquidity
Last year, the Future Fund established a liquidity and treasury function to keep track of the sources of liquidity in the portfolio and potential scenarios that can put pressure on its liquidity position.
Unlike superannuation funds, the Future Fund does not receive new inflows, but it also doesn’t have to plan for members taking money out. Liquidity in the fund is more a matter of ensuring it has sufficient cash to fund its future commitments, which includes, for example, funding foreign exchange margin calls.
When the Aussie dollar is falling is often the time when we need liquidity, but given its historically procyclical nature, it's also the environment where actually you'd rather be deploying capital than raising capital. And so, that's a real challenge for us
It also aims to keep enough liquidity at hand to buy into assets when market dislocations take place.
“We’ve done a lot of work on liquidity and flexibility, and that’s really something that we’ve increased since COVID-19,” she says.
“One of the challenges is [that we are] an Australian dollar investor with a largely offshore portfolio denominated in foreign currencies, and so have to manage the way the portfolio is hedged.
“When the Aussie dollar is falling is often the time when we need liquidity, but given its historically procyclical nature, it’s also the environment where actually you’d rather be deploying capital than raising capital. And so, that’s a real challenge for us,” she says.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.