Jamie Mead
The significant changes in the funds management industry in the past decade have brought issues such as liquidity, correlation and diversification to the forefront, and created new risks for investors to manage, says Jamie Mead, CEO of Talaria.
He said fund managers have had to respond to major changes such as the Your Future Your Super reforms, the huge growth and influence of superannuation funds, insourcing of investment expertise, industry consolidation, and the rise of passive investing, to name just a few.
“We’re also currently seeing a notable shift in interest towards private markets at the expense of public markets.
“The big question mark is, how aware are investors of the impact of these changes on them, and the risks that they pose?
“With the rise in passive investing and index aligned ‘active’ strategies, currently we believe there is a lack of genuine diversification in portfolios and many investors are sleepwalking into concentration risk. True diversification requires exposure to different asset classes, active conviction, structural risk management, and liquidity,” he said.
Mr Mead says one critical factor in the current environment, where there are more Australians in retirement than ever before, is having more liquid investments, as this allows retirees or pre-retirees to meet their financial obligations or take opportunities more easily.
However, he says liquidity is just one factor, as there is also the need for decorrelated income, which is earned from sources other than dividends and helps investors meet their living needs – particularly important during market downturns.
“This allows investors to receive income without drawing only on their capital base or relying on companies to pay dividends when that isn’t always reliable or consistent,” Mr Mead said.
“Lower volatility strategies are important because they allow a smoother return profile. A person earlier in their career can ride out market drawdowns, whereas a retiree who needs the capital to both drawdown over time as well as generate income can be significantly disadvantaged if they need to withdraw funds at a distressed price.”
Mr Mead says in an investment landscape increasingly shaped by passive strategies and concentrated market exposures, some fund managers have benefitted by carving out a distinct position as leaders in alternative asset management.
“While the alternative assets space has seen a shift toward private equity in recent years, we think there are still outstanding opportunities in public markets, and our focus is on offering investors the benefits of alternatives such as lower volatility, low correlation to index funds and indeed many ‘active strategies that are not very different from the index, and unique return sources, while maintaining full liquidity and transparency.
“This approach has proven particularly relevant in an environment where many portfolios are overexposed to narrow segments of the market, such as the “Magnificent Seven” stocks in the US.
“As such, I believe that remaining ‘true to label’ is more important today than perhaps ever before. It means avoiding style drift through various investment cycles – something our strategy, which has been running for 20 years, has achieved. What’s crucial for us is that our strategy is process driven – it’s not about individuals, whims or the latest theme-du-jour but a focused adherence to a process that aims to deliver strong risk-adjusted alternative performance results. For clients it’s crucial that we keep doing this.”
Talaria uses an options implementation process when buying shares. The manner in which they do this aims to deliver three key outcomes, namely structurally lower market risk, less market volatility and an additional decorrelated return source aligning with the risk-return profiles of sophisticated investors, while often outperforming traditional hedge fund indices.
“Our strategy reflects a long-term vision with an actively managed approach that delivers differentiated returns rather than tracking indices.
“In an era where many portfolios are inadvertently regulated by index-linked strategies, our philosophy emphasises the importance of fundamental research and unique implementation process,” Mr Mead said.