Thinking outside the box with non-traditional investment strategies

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Speaking at a recent IMAP webinar, Nigel Crampton, Peter Tiffin and Andrew Lowe explored some non-traditional approaches to portfolio construction for delivering income to investors. The webinar was part of an IMAP series hosted by Michael Karagianis - a senior consultant at JANA Investment Advisers

The phrase, ‘We live in interesting times’, has largely defined 2020, as the world responds to the challenges of COVID-19. However, what has clearly emerged as a result of the pandemic has been the relative failure of defensive assets to provide the income and liquidity that investors expect in a low rate environment.

It’s a view supported by the Head of Managed Accounts at Milliman, Nigel Crampton, who believes that advisers need to increasingly ‘think outside the box’ and consider non-traditional strategies that are better placed at delivering income for clients during this period of low interest rates.

However, when it comes to ‘looking outside the box’ at defensive strategies, Nigel cautions the profession not to assume that increased levels of product complexity or costs means a better solution for clients.

“On the back of Millman’s consulting pedigree and expertise in risk management, we have constantly seen the industry build products that don’t fit within the advice process,” Nigel says.

This led Millman to consult with advisers on how it could bring its institutional grade capabilities to provide a risk management solution to advisers and their clients. This resulted in the development of its SmartShield Series of managed accounts, which features built-in portfolio protection that can be turned either on or off without having to sell the underlying investments.

Milliman’s SmartShield Series - a set of managed account portfolios with built-in risk management protection - took out the Innovation category at the 2020 IMAP Managed Account Awards. To read more about the SmartShield managed accounts, click here.

Launched in March 2020, the SmartShield Series is a set of four managed account portfolios - moderate, balanced, growth and high growth. Nigel says this is not a capital guarantee product but rather, a product that shields investors from severe market downturns. The protection is provided

through a unitised vehicle, as part of the portfolio that hedges the risk of the ASX and international

equity markets through the use of forwards and cash.

“No client likes losing money, but they are prepared to take some risk. However, clients start to panic and make irrational decisions when portfolios are falling, so this product puts the brakes on to shield clients from that severe market downturn,” he says.

“SmartShield is a simple and affordable solution for clients. We offer four diversified portfolios that are aligned to risk profiles, with the total cost to the client being less than 50bps. Our institutional grade built-in portfolio protection within a managed account structure is highly accessible and flexible. It is daily priced, liquid and fully transparent.

Peter Tiffin Ironbark
Peter Tiffin - IronBark
Nigel Crampton Milliman
Nigel Crampton - Milliman
Andrew Lowe Challenger
Andrew Lowe - Challenger

No client likes losing money, but they are prepared to take some risk. However, clients start to panic and make irrational decisions when portfolios are falling, so this product puts the brakes on to shield clients from that severe market downturn.

Nigel Crampton

It’s important that advisers match the product and strategy to the specific needs of clients. If you’ve got sophisticated clients who require complex alternative strategies, then there are a wide range of opportunities available. But if you have clients with low incomes, then perhaps a simpler strategy that the client can understand is a better choice for them

Peter Tiffin

Alternatives

In his position as Head of Investments at Ironbark Asset Management, Peter Tiffin is involved in identifying managers, in both traditional and non-traditional asset classes, that he thinks will capture alpha. This includes the ‘alternatives’ sector.

“The alternatives sector can be considered as a possible solution to fixed income and trying to generate some yield,” Peter says. “In this space, we’re looking at mid-market listed infrastructure, and we’re currently very interested in Chinese government bonds and Chinese convertibles.”

Peter believes alternatives should form part of any diversified portfolio. However, he concedes that some alternative strategies can be difficult to understand and warns advisers that if there are managers they are considering using that cannot clearly explain their process, then walk away and find another manager whose process you can understand.

To help Ironbark better understand the processes used by its managers, it divides alternative managers into three categories: growth managers, defensive managers, and managers providing uncorrelated returns.

“In the growth group, we look at those managers whose biases, structures and processes are likely to give you returns that are directionally similar to equities, and one of those is corporate debt,” he says.

“In the defensive group, these managers move in a different direction to the equity market, like tail risk hedging and long/short managers. And the third group of managers are those providing uncorrelated returns, which include macro managers.” 

Peter explains that as part of its screening process of managers, Ironbark insists that managers provide a clear and concise explanation of their framework, which enables Ironbark to compare the manager within its categories and how each is performing relative to its peers and benchmark.

“It’s an approach that works for us, so I recommend advisers find managers that can explain their process in a way they can fully understand, which then allows advisers to confidently explain the process to their clients.”

However, while Peter concedes that alternative strategies can be difficult for some retail investors to understand, he is also confident that there is a growing range of sophisticated investors at the retail level.

“We’re already seeing advisers talking to sophisticated investors who fully understand and appreciate, for example, delta hedging, and there are products that are suitable for this type of investor. Likewise, there is a whole range of clients who really just want to have something that protects them from an equity downturn and reduces portfolio volatility, and there are a range of alternative strategies suitable for these clients,” Peter says.

“Therefore, it’s important that advisers match the product and strategy to the specific needs of clients. If you’ve got sophisticated clients who require complex alternative strategies, then there are a wide range of opportunities available. But if you have clients with low incomes, then perhaps a simpler strategy that the client can understand is a better choice for them.” 

If we were to allocate an amount into a lifetime income stream, we can effectively lock in a layer of income over and above the Age Pension, which effectively addresses essential spending requirements. So, irrespective of what happens in investment markets or how long a client lives, we can guarantee a reliable income stream for clients in retirement.

Andrew Lowe

Lifetime Annuities

Challenger is best known in the market for its annuity products, which provide investors with financial security in their retirement. And when it comes to retirement income stream strategies, Challenger offers a range of different investment solutions, including guaranteed and non-guaranteed options.

According to Challenger Head of Technical Services, Andrew Lowe, one of the most significant risks that retirees are exposed to in a low or zero rate environment, is the “real risk” of running out of retirement income.

“When assets become depleted, the risk of running out of income is very real for retirees,” says Andrew. “This is the retirement danger zone. The prospect of living on $37,000 per year, which is the maximum rate of Age Pension for a couple, or $24,500 for a single, is tough.”

According to Andrew, Challenger is seeing advisers increasingly using tools, strategies and investment products to blend different income streams to help address this risk. He adds that one of the best ways advisers can do this is with a guaranteed lifetime income solution.

“If we were to allocate an amount into a lifetime income stream, we can effectively lock in a layer of income over and above the Age Pension, which effectively addresses essential spending requirements. So, irrespective of what happens in investment markets or how long a client lives, we can guarantee a reliable income stream for clients in retirement,” he says.

“This is another non-traditional approach to protecting investor income in retirement that advisers should consider as part of their approach to portfolio construction.”

About

Nigel Crampton is Head of Managed Accounts at Milliman.

Peter Tiffin is Head of Investments at Ironbark Asset Management.

Andrew Lowe is Head of Technical Services at Challenger.

They spoke on defensive portfolios as part of an IMAP specialist webinar series on ‘How to meet defensive portfolio goals’.

The session was moderated by Michael Karagianis - Senior Consultant at JANA Investment Advisers.

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