Strategic asset allocation is at the heart of the investment strategy of investment firm Sun Venture , but before you set an SAA you need to understand the purpose, investment objectives and the drivers of the portfolio, Serene Tan says.
Sun Venture Pte Ltd is an Asian investment firm based in Singapore. Founded in 2006 by its current Chairman, Ricky Au, to manage proprietary assets, the firm has the mandate to invest globally across several asset classes, including public equities, fixed income, private market funds, real estate and alternatives.
Serene Tan is the Head of Investment for Sun Venture and joined the firm at the end of 2021 after a 14-year career at Mercer.
Tan is responsible for the asset allocation and strategy of the portfolio. Asset allocation is of critical importance to Sun Venture, Tan says, but to set an appropriate strategic asset allocation (SAA), you need to understand the purpose of the portfolio, as well as the investment parameters that will affect your risk tolerance.
“When we model the SAA, there are certain parameters that will influence the asset allocation – the risk appetite, return expectations, asset class preferences, investment horizon and the liquidity needs of the principal,” she says.
“We believe that a methodical and structured strategic asset allocation process, coupled with a deep understanding of market dynamics for all our asset classes, is the anchor to our investment program.
“We are a long-term investor, but we are also, to an extent, opportunistic in the sense that we take advantage of market dislocations.
“We are agile and have the ability to adjust our portfolio to changing market dynamics while differentiating between short-term noise and market regime changes.
“We don’t have short-term liquidity needs, in fact, our core real estate holdings are cash-flow-generating assets. This is an important consideration in any investments, being cash-flow positive and having no short-term liquidity needs.”
Having established the purpose of the portfolio and the key drivers that will impact the asset allocation, then the choices behind the asset allocation of Sun Venture become clear. The firm’s overall investment program is a stable, capital-appreciating portfolio with a mid to high return profile.
“We are set up with four internal investment teams, which we call our four investment pillars,” Tan says.
Sun Venture has the risk appetite and ability to take illiquidity risk for our investment program. Hence, we are able to harvest the illiquidity premium via investing in private markets. Being a multi-asset investment firm and having a global mandate, Sun Venture also has the ability to build a hedge fund program to reduce the portfolio’s overall beta risk. As such, we can have an SAA that is akin to a typical endowment model
“The first pillar is real estate, we have a team of six. This team performed the whole spectrum of deal sourcing, acquisition and management of the properties in our portfolio. These are mostly core office buildings and we are setting our sights on establishing a foothold in key gateway cities.”
Sun Venture initially invested exclusively in the Singapore real estate market, but in recent years it has diversified its portfolio with acquisitions in the prime London commercial real estate market.
For example, in February 2022 it acquired 120 Moorgate from WeWork Capital Advisors for £148 million, about A$250 million. In 2020, it closed one of the largest cross-border real estate deals that year when it purchased 1 & 2 New Ludgate in London for £552 million, or A$938 million.
The second investment pillar is listed equities. The firm uses external managers for its global equity mandates, but also runs an in-house Asian equities portfolio, which also invests in Chinese equities.
“At Sun Venture, we play to our strengths. Being based in Singapore, we know Asia well and there is value in managing high-conviction Asian and Chinese equities in-house,” Tan says.
The third investment pillar is private markets. “We have been building up our private equity capability steadily with a view to expand our direct investments in Singapore and South-East Asia,” Tan says.
The fourth and final investment pillar is the asset allocation and investment strategy team, which Tan runs together with Valerie Tang, who is Manager, Investment Strategy, at Sun Venture and another former Mercer staffer.
“Sun Venture has the risk appetite and ability to take illiquidity risk for our investment program. Hence, we are able to harvest the illiquidity premium via investing in private markets. Being a multi-asset investment firm and having a global mandate, Sun Venture also has the ability to build a hedge fund program to reduce the portfolio’s overall beta risk,” Tan says.
“As such, we can have an SAA that is akin to a typical endowment model.”
The endowment model, as developed by David Swensen at the Yale University Endowment Fund, has been an inspiration for many family offices and although it requires some adjustment for the local market conditions, Tan says its philosophy of diversifying risk and building downside protection through alternatives and hedge funds is still a useful one.
“I do agree that the high returns from the hedge fund industry in the 1990s, when they started out, are probably not repeatable,” she says.
“And while the Yale model is commendable, not everybody has the access to the top-quality managers that the Yale endowment has.
“Nevertheless, while it is difficult to replicate what Yale has, we can still emulate the key concepts behind it: having a growth asset bias, focusing on appropriate asset class diversification and having an absolute return allocation (that is, hedge funds) that have low correlation to equities.”
Tactical Investments
Besides applying an SAA for its investment program, Sun Venture also employs a tactical asset allocation (TAA) to take advantage of temporary market dislocations due to economic or geopolitical events.
“In our TAA modelling, we incorporate how we view the world, including inflationary pressures, the strength of the US dollar, stagflationary scenarios, and we analyse the impact of all these scenarios on the different asset classes,” Tan says.
“For example, we have exited our positions in US treasuries late last year and we have reduced our public fixed income space as well earlier this year to prepare the portfolio to move into private debt funds.
“Given the dislocations in the markets, we feel it could be an opportune time to invest in private distressed debt funds, which will deploy capital in the next six to 18 months.”
At the same time, while it is too premature to invest in these sectors now, Tan is also looking at selected Asian high-yield funds to weigh up opportunities in this area.
All of these tactical considerations need to take place within a preset risk budget to ensure the portfolio stays within the integrity of the SAA.
“There has to be some operating bands around the asset classes, because if you allow too much deviation from the set SAA, you could be running a portfolio with a much higher risk tolerance than what you initially budgeted for,” Tan says.
ESG and Decarbonisation
Environmental, social and governance (ESG) issues are front of mind for many institutional investors around the world, especially pension funds. But for many family offices and smaller investment firms, ESG is relatively new territory.
Sun Venture is at different stages of implementing ESG policies in its various asset classes, with its real estate portfolio being the most advanced. Sun Venture recognises its properties play a vital role in delivering ESG benefits to the wider community.
It endeavours to meet and exceed global ESG standards by enhancing and updating its properties. It has implemented sustainability best practices in its processes and operations to reduce consumption and minimise environmental footprint. It also supports their tenants to meet their ESG commitments. To this end, its properties have won various sustainability awards.
But for other asset classes the journey has just started and Tan is looking to develop a firm-wide approach to it.
I feel that over the past two years, there is a fair amount of greenwashing in this industry. Sometimes industry players talk about ESG without having a specific committed target or even appropriate measurements in mind. That to me is not appropriate
“ESG is a conversation that you need to have first with the key stakeholders, the Board, the Chairman, as well as with the various investment heads. There must be a consensus on which aspect of ESG do we embrace and whether we would like to apply a consistent standard across our four investment pillars,” she says.
“I feel that over the past two years, there is a fair amount of greenwashing in this industry. Sometimes industry players talk about ESG without having a specific committed target or even appropriate measurements in mind. That to me is not appropriate.
“No doubt the global issues of climate change and social needs are important, and as responsible asset owners we have to take positive steps to address these issues. However, a carefully crafted investment approach, with clear milestones and well-calibrated benchmarks are elements of success in this journey so that we can embark on ESG in a deliberate and sustainable manner.”
__________
[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.