Grant Forster

Principal Global Investors Australia (Principal) has announced their Global Real Estate Securities strategy has recently been awarded a number of mandates including BT New Zealand and the Australian Construction Industry Redundancy Trust (ACIRT).

In further endorsement of Principal’s strength as a global real estate manager, the Principal Global REIT Fund (the fund) has also received a Zenith ‘Highly Recommended’ rating.

Grant Forster, CEO for Principal in Australia, said: “We are delighted to announce that BT New Zealand and ACIRT are joining us as clients. Their decisions show welcome recognition of the expertise of Principal Global Investors in managing real estate securities.”

Michael Gaffney, Director Institutional Sales, said: “The Principal Global Real Estate strategy continues to gain favour with our clients. Our competitive advantage is gained through the strength of our portfolio construction, coupled with the depth and quality of the Principal Global Investors real estate team.”

BT Funds Management (NZ) Limited is the investment arm of Westpac in New Zealand. The firm manages over US$10bn in assets under management, predominantly comprising multi-asset portfolios under a best in class outsourced methodology.

Commenting on BT’s decision to award the mandate to Principal, BT New Zealand Head of Investment Solutions Matthew Goldsack said: “Following a global search, we chose to partner with Principal for its core investment approach and longterm track record of adding value. The quality of its people and portfolio construction principals sets it apart from other managers. The Principal Global REIT Fund is an important component of BTNZ’s diversified fund strategy, and the appointment of Principal has allowed us to broaden our approach to the management of listed real estate assets, which adds real value to our products, for our customers, over time.”

In addition to the new mandates, Principal also announced that the Global REIT Fund had been awarded Zenith’s highest rating of ‘Highly Recommended’. The Zenith report notes that the the fund has performed well over time, achieving an outperformance ratio of greater than 50%, in all market conditions, over a range of time periods. The report also highlights that the fund has outperformed the Zenith assigned benchmark and median manager over all periods, placing it in the first and second quartile of assessed managers over all time periods.

Mr Forster said, “The fund was created for investors looking for reliable income and capital growth potential. Principal’s globally integrated approach has contributed to the fund’s strong peer relative performance in recent years, supporting Zenith’s increased conviction, leading to the award of the highest ranking. This is a verification of the quality of our real global estate investment team as well as the investment philosophy of the fund.”

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Mr Gaffney joins the Institutional Advisory Services team and will be based in Sydney. In his role, Mr Gaffney will be responsible for generating institutional sales and maintaining consultant relationships in Australia, consolidating the success achieved by the Principal in the institutional and sub-advisory channels.

Grant Forster, Chief Executive of Principal Global Investors Australia, says Mr Gaffney’s appointment will bring further depth of talent and industry knowledge to the Australian team.

“Michael’s scope of expertise will be invaluable to our team and our clients. I am confident that his comprehensive industry knowledge will assist in the growth and development of our business, given his experience working in different markets and across diverse asset classes. It’s a breadth and range of capability that matches that of Principal Global Investors.”

Mr Gaffney has twenty years’ experience managing institutional client and intermediary relationships in the funds management industry. He joins from nabInvest, the boutique asset management division of National Australia Bank, where he served as an Investment Specialist with the Institutional Distribution team. Prior to this, he held distribution roles with Challenger in Australia and Bank of Ireland Asset Management in Dublin. Mr Gaffney holds a Bachelor of Science in Business Administration from Manhattan College, New York, and a Certificate in Investment Management from the Society of Investment Analysts in Ireland (SIAI).

Commenting on his appointment, Mr Gaffney said: “Principal Global Investors is a premium manager with an excellent global reputation and I am very pleased to be making this move. I look forward to working with Grant and the team to deliver Australia’s institutional investors global investment solutions derived from the Principal’s multi-boutique model.”

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Grant Forster

An independent survey by CREATE-Research, commissioned by Principal Global Investors, has revealed a fundamental shift in the mind-set of investors. The priority for investors is now focused on adopting goal-oriented approaches that mitigate unrewarded risk, rather than chasing the highest potential returns.

As markets continue to defy previously held investment logic, investors understandably remain cautious. This has led to an increased demand for strategies tailored to take account of investor concerns and minimise unrewarded risk exposure.

The shift, a by-product of a sustained low rate environment, marks a fundamental change in investor attitudes rather than a short-term trend.

Grant Forster, CEO of Principal Global Investors Australia, commented: “The financial crisis taught investors a number of lessons, but a key takeaway for all was greater caution. Investors have become more risk-aware and more agile than ever before. In 2013, the quest for yield was evident. In 2014, as caution has become more embedded in the investor psyche, investors have recalibrated their return expectations.

“While the debate around active versus passive has been resurgent, the real focus of the industry should be on adapting investment solutions to the new goal-oriented and risk-adverse mind-set of investors worldwide. Customisation is the name of the game.”

This fundamental change in attitudes can be seen in the behaviour of all four different investor groups.

• DB investors are turning to real assets and alternative credit because inflation protection and regular income have gained importance over high returns, and phased diversification is preferred over asset maximisation.
• DC investors continue to favour life-cycle funds thanks to their time-based, tailored approach. These funds support the goal of downside protection as they adjust to varying market conditions and the risk-appetite of investors at different times during the market and life cycle.
• Retail investors are displaying a general acceptance of lower yield with solutions alpha gaining importance over product alpha.
• High net worth investors have moved away from a blanket focus on alpha to an emphasis on risk mitigation. They have become particularly cautious in developed markets and especially demanding in emerging markets in order to manage unrewarded risk. A preference for active management remains.

Professor Amin Rajan, CEO of CREATE-Research and the author of the CREATE series, commented: “While the investment environment remains challenging, investors want two things: low-cost options to meet their perceived needs and assets that can deliver specific goals. The latter includes capital growth, regular income, inflation protection and capital conservation. This is the age of goal-oriented investing.”

Key global trends in asset allocation and investor preference for certain asset classes that have developed between 2012 and 2014, include:

DB investors

• The popularity of real estate has increased by 26%, from 40% in 2012 to 66% in 2014 while infrastructure has experienced an equally significant increase of 23%, from 43% to 66%.
• The popularity of alternative credit has increased by nearly 20%, from 38% to 56%.

DC investors

• Target-income funds recorded the largest increase in investor interest of 22%, from 34% in 2012 to 56% in 2014.
• Target-risk funds saw an increase of 14%, from 36% to 50%.
• Target-date funds, an increase of 12%, from 52% to 64%.

Retail investors

• Funds with an income focus have become the most popular choice over the last two years with an increase in investor interest of 14%, from 48% in 2012 to 62% in 2014.

High Net Worth investors

• Real estate has become notably popular, showing an increase of nearly 25% in investor interest, from 37% in 2012 to 61% in 2014.
• Investors continue to prefer active management with an increase of 25%, from 29% in 2012 to 54% in 2014.

Principal Global Investors is an investment solutions provider catering for all four investor groups. The full 2014 report, Not All Emerging Markets are Created Equal and the asset allocation paper,Asset Allocation: No Longer One Size Fits All, are both available at: create.principalglobal.com and www.create-research.co.uk.

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The Japanese market has some things to teach investors.

At a time when investors from developed nations are facing the relatively new challenge of the ‘hunt for yield’, investors from one of the world’s largest economies are old hands at the game.

And, according to major international asset manager, Principal Global Investors, there’s a lot to be learned from the strategies they have adopted to address issues relating to low or no GDP growth, massive debt and a zero interest rate environment.

The economy in question is Japan.

“The fact is that Japan was a forerunner to many of the issues that have now become endemic in advanced economies and are causing investors and investment managers to rethink their entire strategies,” explained Grant Forster, Australian CEO of Principal Global Investors. “Japanese institutional investors have attracted ongoing international attention as investors worldwide maintain a watching brief on where those funds, previously invested domestically, might land outside of Japan.”

As Mr Forster pointed out, while one-time poster child economy Japan may now be best known for its decade-plus doldrums, it is still the world’s third largest economy – and not just any economy at that.

“The Japanese market is highly sophisticated and despite its well-publicised macro difficulties, life there – including steady and intensive investment – continues,” he said. “What Principal has observed through a growing presence there is a range of investment patterns that, given the global conditions we are now facing, may well be instructive to investors elsewhere.”

Hitoshi Itagaki, President of Principal Global Investors (Japan) Ltd. makes a number of observations along these lines.

“Principal Global Fixed Income has seen, first hand, the effects of the Bank of Japan’s (BoJ’s) policy moves to weaken the yen,” he explained. “The BoJ’s massive buying of Japanese Government Bonds (JGBs) has effectively pushed Japan’s institutional investors out of the country in search of foreign assets and higher yields. Bonds denominated in U.S. dollars have received particular attention, and with low yields on Treasuries, and some areas of fixed income not typically known for drawing the interest of Japanese investors have been garnering attention: investment grade credit and high yield.”

Mr Itagaki went on to say that, during September, the Ministry of Finance International Transactions data has been showing data to support the anecdotal evidence he has been seeing in the marketplace. This recent data points to net purchases of foreign bonds, a trend the Principal fixed income team expects to continue.

He then turned to the issue of Japanese trends in equity investing, which are also changing.

“Our team has noted that Japanese retail investors are looking to equity income strategies to provide their portfolios with much-needed yield. With very low domestic yields and the recent weakening of the yen, they seem to have a renewed thirst for diversification beyond their home market,” he said.

Mr Itagaki also gave some perspective on the current Japanese view of Australian equities – with which Japanese investors have long been comfortable given historical relatively high dividend yields.

“Amid the slowdown in Australia’s major trading partner, China, Japanese investors have recently shown more interest in both US and Canadian equity income strategies – particularly Canada,” he said. “With its commodity-rich economy and above-average dividend yields, Canada offers many parallels to Australia, which Japanese investors find appealing. This is bolstered by the fact that North American growth prospects have improved rather than slowed.

Mr Itagaki also believes the multiboutique approach of the Principal allows institutional investors looking for yield to more readily create income oriented solutions under the one roof. For example, investors seeking yield could blend specialist managers allocating to preferred securities, investment grade short and long duration, and emerging debt all using specialist boutiques within Principal Global Investors.

According to Mr Forster, what it all comes down to – whether in Australia, the United States or Japan – is that investors are seeking managers that can be flexible in the range and number of solutions they offer.

That means managers that can both anticipate change and be responsive to the challenging situation in which investors find themselves. The managers who are providing investors with broad ranging expertise and open thinking are the ones that are delivering the value. They are the ones that investors should be seeking.”

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The report, entitled Market Volatility: Friend or Foe, provides a view of the challenges and opportunities presented by market volatility.  It surveyed 289 respondents including asset managers, pension plans, pension consultants and fund distributors from 29 countries with a combined AuM of over US$25 trillion. The survey was followed by 100 interviews.

Prof. Amin Rajan, CEO of CREATE-Research and the report’s author, comments:
 
“The last four years have been the most volatile in the history of equity markets. Price fluctuations of 4% or over in intra-day sessions have occurred six times more than they did on average in the previous 40 years. Extreme spikes in market volatility and closer asset class correlations have been common.  History shows that opportunity is inherent in periods of high risk and that high risk can reward active management.  Investors want to know whether asset managers can convert market volatility into an investment opportunity.”
 
The headline findings suggest that the asset management industry faces significant challenges in converting the opportunity of persistent volatility into investment performance.  71% of asset managers in the study signalled that prolonged market turbulence offers great opportunity for active managers to deliver good returns.  Conversely, only 13% believe that the industry can currently capitalise on this. 
 
The report identifies four key actions that respondents believe asset managers should take to overcome the challenge and prevent another ‘lost decade’ of returns: develop multi-asset class capabilities (53%); ensure interests are more aligned with clients to share pain and gain (53%); encourage free thinking and high conviction investing (50%), and promote greater client engagement to minimise risk (66%).
 
Grant Forster, CEO of Principal Global Investors Australia, comments:
 
“What this report clearly signals is that the asset management industry must take urgent and specific action if it is to capitalise on the inherent opportunity in volatility for clients. 
 
“It’s never been more important to partner with clients and provide customised solutions based on their changing needs and investment goals. In Australia in particular, where there is more soul searching about asset allocation than any other country, the Report has shown that Asset Managers have been – and will be – enhancing their capabilities across a wide range of asset classes, after a clear acceptance of two facts: that the domestic equity market is now susceptible to the contagion effect of globalisation; and that new opportunity sets are vital if the managers are to maintain their relevance in a fast changing pension landscape. At Principal Global Investors, we have relationship managers focussed on understanding and delivering against client needs and align our compensation with the results – we don’t succeed unless they do.”
 
The report reveals that investors, like asset managers, see opportunity in volatility, but that their requirements of asset managers have changed. Specifically, in an environment of prolonged uncertainty, they no longer see risk on / risk off trades as a binary choice and are becoming more goal-orientated, managing risk more than return.
 
In practical terms, this means investors, most notably Defined Contribution (DC) and retail, will seek a more dynamic asset allocation strategy; blending elements of both risk on and risk off.  The study reveals that managers believe 49% of Defined Benefit (DB) clients, 45% of DC clients and 47% of retail clients will de-risk as well as re-risk and that they will use a variety of avenues:
 
DB clients:

• De-risking – Liability-driven investment strategy (LDI) (57%), diversification (56%), and fiduciary management (44%)
• Re-risking – absolute return strategies (45%), unconstrained mandates (37%), active trading strategies like hedge funds (34%) and high conviction investing (32%)

DC clients:

• De-risking –advice-embedded products (55%), diversification (52%) and capital preservation tools (38%)
• Re-risking – dynamic glide path strategies (48%), absolute return strategies (27%) & high conviction investing (24%)

Retail clients:

• De-risking – diversification (48%), advice-embedded products (46%) and capital preservation tools (36%)
• Re-risking – active trading strategies (34%) and absolute return strategies (28%)

Grant Forster, CEO of Principal Global Investors Australia, continues:
 
“The effectiveness of diversification has been a topic of debate over the last few years. One of the most compelling insights from the study is that investors’ views about risk and return are evolving rapidly, calling for a more dynamic approach to managing volatility. Many Australian investors are now opting to manage their own funds in a Self-Managed Super Fund, a hugely popular option with an emphasis mostly on de-risking. Most supers in Australia are expected to move away from the traditional 70:30 equity-bond mix un favour of the old balanced approach but with two big differences: a very broad asset base and the facility to implement tactical changes.“A nimble business structure that allows the craft of asset management to thrive along with a focus on risk management and long-term investment are imperative to executing dynamic strategies in turbulent markets, whether it is for capitalising on volatility or capital preservation.”
 
The full report is available at: www.createresearch.co.uk and www.create.principalglobal.com

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