Evans & Partners CIO Tim Rocks talks about the constraints and opportunities of the private wealth space compared to his days in the institutional sector.
When Tim Rocks joined Evans & Partners in 2017 as Chief Investment Officer, he found himself in a very different environment than in his previous role as Head of Market Research and Strategy for BT Financial Group, where he ran the asset allocation for Westpac’s $30 billion superannuation fund.
Moving from an institutional investment role to a private wealth position meant a very different set of constraints and opportunities. Although working with smaller portfolios, Rocks feels he now has far more freedom in making investment decisions that move the dial.
“I found super fund investing to be very constrained,” Rocks says in an interview with [i3] Insights.
“Your ability to move money around and actually make decisions is so limited.
“A big asset allocation call, where you are moving incrementally within equities, you do that a few times a year. I mean, there are only so many decisions that you make in a year really.”
The Westpac environment was also more constrained than a typical industry super fund, he says. Whereas many industry funds invest big into unlisted assets, he couldn’t do the same.
“If we wanted to buy a private asset, a stake in an airport for example, then that would have to go to the main Westpac board and they would put all these constraints on it. So basically that was just too hard,” he says.
“There were just so many things that everyone else was doing at the time, including private assets and private equity, that we just couldn’t do.”
“I found super fund investing to be very constrained... A big asset allocation call, where you are moving incrementally within equities, you do that a few times a year. I mean, there are only so many decisions that you make in a year really
He enjoys the private wealth environment better because he is far closer to the end beneficiary and has the ability to shape investments to their needs.
The constraints here are more about the profile and financial understanding of the client, although he does acknowledge the smaller scale of the private wealth industry puts limits on the type of managers he can access.
“The biggest constraint is access, particularly once you leave the traditional asset space. “We don’t have access to the same range of infrastructure funds and private equity. In private equity, for example, there are only really a half dozen or so investments that we use regularly,” he says.
“Because for smaller balances you can’t go into a lot of the really big names, who often have $1 million to $2 million minimums.
“Our client base is pretty liquidity aware too. They are, for the most part, reluctant to put large amounts of money away for 10-year periods, the term that traditional private equity provides.
“But we’ve got significantly less constraints in everything else we do.”
He also has his doubts about whether private assets have lived up to the hype, particularly when looking at the performance of these assets in the past decade.
“I think there’s an open question of whether in private assets you have been rewarded for the liquidity and complexity in the last 10 years. Obviously there are some funds that have done better than others,” he says.
Emerging Markets
Working directly with clients means Rocks can shape portfolios that cater to the individual needs and select assets that fit best with their investment horizon.
This often means they can take more risk in their portfolios than they would get in off-the-shelf products, especially when it comes to the next generation in wealthy families, who are often now in their forties.
“A lot of the conversations we have with clients are about the timeframe of their investments and having investments that match that timeframe,” Rocks says.
“If you’re a 40-year-old thinking about building a pool of money for a time, then you’ve got a 20 to 30-year timeframe. You should be investing in companies that are going to be good performers over that time frame.
“So why would you be focused on yield? Why would you buy telco or utility? You should be growth focused.
“In this case, we try to get our portfolios tilted towards growth. Not because we think growth is going to be the best performer in the next year, but because we know that over 20, 30-year periods it must be the case that higher-quality companies do better, that growthy companies do better, that small caps do better and emerging markets should do better.”
We try to get our portfolios tilted towards growth. Not because we think growth is going to be the best performer in the next year, but because we know that over 20, 30-year periods it must be the case that higher-quality companies do better, that growthy companies do better, that small caps do better and emerging markets should do better
Although many investors have been disappointed with the performance of emerging market stocks in recent years, he says these markets move in long cycles, starting in the 1980s when the so-called Asian Tiger economies of Singapore, Hong Kong, South Korea and Taiwan emerged.
Then came the 1990s, where Asian economies faced a decade of crisis, including a big banking crisis in the late ‘90s.
The next wave of growth came from China, whose economy went through a spectacular expansion, which eventually started to slow down around 2015.
“People are talking about reform now, but actually the process really started in 2014-2015, when China started to slow down and tried to take its foot off the accelerator. This really has driven the last decade,” Rocks says.
But he is optimistic about emerging markets going forward, especially when it comes to the prospects of countries including India and Mexico.
“There are lots of reasons to think that there’s a third wave out there. It’ll be a different set of countries this time; it’s going to be India, Mexico and maybe Indonesia,” he says.
“The key part of that growth in India and Mexico is for different reasons [than in China in the past] and relates to that whole reshoring issue. Mexico is the biggest winner from that factory relocation.
“For example, Tesla is building the world’s largest auto production facility ever. Where is it building that? It is building that in Mexico.”
He points out Mexico has a number of clear benefits to companies in North America, including land borders, rather than sea borders and, critically, it is part of the North American Free Trade Agreement.
“It’s got a free trade agreement with the US, so manufacturing in Mexico is effectively the same as in the US, but with wage rates that are a fraction of what they are in the US,” he says.
Active, Passive and Direct
Many investors believe that in the Australian equity market, active management has a clear advantage over index funds, because the market is heavily skewed towards banks and resources, while it has a long tail of speculative mining companies.
Investing in solid, industrial midcaps has often produced better results. But Rocks points out his clients have other considerations to keep in mind too.
“For Australian shares, we tend to recommend clients buy direct shares so they can manage the tax better,” he says.
“For offshore equities, we generally favour active management. Certainly for emerging markets you want an active manager because you’re going to get burned if you’re not on top of the information. But for US equities, we’ll often use something that’s pretty passive and cheap.”
But again, it comes back to the profile of the client, he says. Evans & Partners has a broad variety of clients, from wealthy individuals to charities with $100 million-plus portfolios. These clients receive a more institutional approach that is more fee conscious and includes hedging strategies.
“For those types of portfolios, we use ETFs (exchange-traded funds) to manage hedging. It’s very difficult for us to run a direct hedging strategy, but this is an easy way to express hedging by switching between hedged and non-hedged ETFs,” Rocks 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.