Illiquid assets continue to gain interest from both investors and advice professionals, as they seek to access opportunities not available in listed markets. Michael Karagianis (JANA Investment Advisers) and Danny Wong (Alteris Financial Group) discuss their respective approaches to illiquid investments.

JANA Investment Advisers is a seasoned veteran when it comes to researching and investing in illiquid assets, primarily because its client base is attracted to these types of investments. According to Michael Karagianis — Senior Consultant at JANA Investment Advisers — from a portfolio construction perspective, clients recognise the benefit of investing in these assets.

“JANA has conducted long-term research into the benefits of illiquid assets in portfolios, which includes the availability of an illiquidity premium and the investment opportunities they provide which can’t be accessed in listed markets,” says Michael.

Speaking at the IMAP Advice in Action 2024 conference in Sydney, Michael adds the other benefit provided by illiquid assets for investors is from a volatility perspective. Listed markets are mark-to-market on a daily basis, which does inflate volatility. However, long-term investors — like industry and super funds, and large family offices — are not constrained by daily valuations. These types of investors can afford to park a lot more capital into illiquid assets, and ride out any market volatility.

Not surprisingly, JANA believes there is value in illiquid assets, such as unlisted property, private equity, infrastructure, insurance-linked securities, and royalty funds. However, whilst illiquid investments are a diverse landscape to navigate, one of the biggest challenges confronting advisers is how to include them in a managed accounts structure. Michael concedes, whilst not impossible, it can be notoriously difficult to embed these types of investments in an SMA or MDA.  

It’s a view supported by Danny Wong — Manager Research at Alteris Financial Group. As a financial advisory and wealth management business, accounting for about $2 billion in funds under advice and servicing a mix of both retail and wholesale clients, Alteris has been offering SMAs and MDAs for over five years.

Danny acknowledges that putting illiquids into SMAs is difficult, primarily because platforms don’t like dealing with unlisted assets. Instead, they prefer assets with daily liquidity, which their responsible entities (REs) are very strict on. “So, with SMAs that becomes somewhat restrictive.”

However, it’s less the case with MDAs. “In the MDAs that we’ve run, we’ve had unlisted assets in our portfolios. This allows us to source other types of investments for clients that aren’t mark-to-market,” says Danny.

Michael agrees that MDAs do offer advisers greater opportunity to invest in less liquid and more alternative strategies that can’t typically be accommodated in an SMA structure. However, he says many of JANA’s managed account clients approach illiquid assets by running their SMA as a core strategy and then populating satellites around the core. These satellites consist of opportunistic illiquid investments they feel are going to fulfil their requirements.

As an example, Michael points to the not-for-profit space, where clients might focus on sustainable or impact investments. And while there is illiquidity attached to these types of investments, they also serve a particular purpose of satisfying, for example, the client’s ESG requirements.

“These clients are looking for more niche investments as a supplement to their core portfolio, which are generally perceived as sitting outside a managed accounts structure,” he says.

Michael finds the SMA/MDA connection quite interesting. “Most REs that are controlling an SMA program, will categorically say you can’t have anything other than daily liquidity in the portfolio. However, MDAs are a little different in that this structure does potentially offer more flexibility. For example, JANA runs MDAs on behalf of a client that has a portion of illiquidity in it, so capital is certainly not all locked-up, like you would see in a closed-end private equity fund structure.”

He remains optimistic that at some stage in the future, there will be an increase in the number of wholesale managed accounts available for investors. These type of accounts are specifically targeted to wholesale high-net-worth clients who aren’t constrained by illiquidity or the need to invest in retail structures.   

When putting boundaries on illiquidity, Danny says it comes back to how Alteris runs portfolios across its risk profiles. He says Alteris is very cognisant of exposures, which means when coming down the risk spectrum, there is less allocation to illiquids.

“Ultimately, it’s all about looking at our clients and their cash needs,” says Danny. “Obviously, a client with considerable capital withdrawals coming up would be completely unsuitable to be in illiquid assets. However, for clients with a longer term investment horizon and who are prepared to lock away their capital for a period of time, then we would consider some exposure to illiquids. But from a risk perspective, illiquid assets never make up a huge amount of our clients’ overall portfolios, and are allocated across a number of different types of investments and sub-sectors.”  

In terms of illiquid investment selection, Alteris likes agriculture and development funds, as well as private debt. “With private debt, we do shorter term allocations of one year to 18 months, and we also like unlisted property,” says Danny. “We have a dedicated team that actively searches for opportunities in private debt, but we’re also open to working with credible managers to access what we need.”