Connie McKeage

OneVue Holdings Limited (OneVue) last week agreed to acquire Select Asset Management Limited, trading as Select Fund Services and Select Investment Partners Limited.

Select Fund Services (SAML) is a specialist provider of responsible entity (RE) services and one of Australia’s leading REs for multi-asset trusts. The business also provides services to leading single strategy managers and access to Australia via unit trust fiduciary services for global offshore groups.

Select Fund Services acts as RE for groups such as Neuberger Berman and Smarter Money Investments (50% owned by Yellow Brick Road) who are also clients of OneVue. It has a 12 year track record in fiduciary and RE services with a stable and experienced operations, technology and compliance team.

Select Investment Partners (SIPL) is a specialist multi-asset investment manager and implemented portfolio consultant with a track record of over 12 years managing diversified multi-asset portfolios. The business is based in Sydney with 15 people. SIPL works with financial planners to enable them to offer Customised Portfolios to their clients.

“The acquisition follows OneVue’s stated objective to grow the company organically and acquisitively and is strategically important in delivering value added services to both OneVue’s Fund Services and Platform Services’ clients“, said Connie Mckeage, CEO of OneVue.

The consideration for the Select businesses will be paid $2.7m in cash and $4.3m in OneVue scrip.There is also an incentive component, payable in scrip, for total revenue growth above an agreed threshold in Select Investment Partners during FY2015. Shares issued will have an escrow period of up to 12 months. The cash component will be funded from existing cash holdings.

Brendan Foley, Chairman and CEO of Select, said, “Having worked successfully with OneVue over the last year on a range of projects from unit registry and mFund services to the development of a managed account solution for our customised portfolio solutions, we have seen the complementary nature of our respective client lists and service offerings. By merging the businesses, the current value propositions for our respective clients will be enhanced.”

Select and OneVue are complementary businesses. SIPL strengthens OneVue’s superannuation trustee business, MAP Funds Management. SAML’s services enhance OneVue’s existing Fund Services offering by creating a broader suite of unit registry, RE services and mFund distribution.One of the cornerstones of the transaction is the strong cultural fit of the businesses, and that OneVue’s management capabilities are broadened and deepened.

The acquisition is expected to deliver a number of key financial benefits for OneVue:

• Retail Funds Under Management and Administration (FUMA) will increase from $1,940m to $2,609m (Excludes one asset consulting contract prior to the acquisition advised as winding up in Nov 2014)
• Total Funds under Supervision (FUS) from RE and trustee services will increase from $711m to $1,614m as at June 2014
• Select’s consolidated revenue was $7.1m in FY 2014. Revenue included incentive fees earned in the Investment Partners business of $1.6m and paid on returns in excess of a bank bill benchmark
• OneVue expects that the transaction will be accretive on an EBITDA per share basis in FY2015
• Revenue impact by offering RE services as part of a broader offering to domestic and international custodians and investment managers
• Cost and capital synergies identified

Select employees will join OneVue at their Sydney office. Brendan Foley, Chairman and Chief Executive Officer of Select, will be appointed Deputy CEO of OneVue and two other Select directors will be appointed to the executive team.

“This acquisition will enable us to more effectively deliver a broader range of client solutions. I welcome our new shareholders and I am delighted to be working with a team of people who are aligned with the OneVue team in their thinking and equally committed to making a difference” Connie Mckeage, CEO of OneVue, concluded.

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Alex writes his perspective from the position of a multi-asset investment firm that has incorporated some hedge funds and other alternative investments into its diversified portfolio construction since inception in 2002.

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There have been attempts over many years to classify alternative investments and hedge funds into defensive and growth categories. Why? Expediency is one reason – the primary purpose was to mirror existing industry terminology used to classify mainstream asset classes like shares and fixed interest.

Additionally some allocators placed hedge fund strategies into specific asset classes based on their return characteristics.  Low risk (or more accurately “standard deviation”) funds were included as “fixed income” and higher standard deviation managers as “equity” irrespective of whether they invested in those asset classes!  This made portfolio construction easier but failed to analyse the true characteristics of these investments – allowing the crazy situation of derivatives funds classified as fixed income.  The problem was that these low or higher standard deviation hedge funds did not exhibit the same characteristics as equity or fixed income in many other ways and they shouldn’t have been sold (or bought) on that basis. It is not unreasonable however, where the advisor is more sophisticated, that long/short equity funds that are exposed to the market can be included in equity allocations as they exhibit the same characteristics based on many measures.

Unsurprisingly confusion remains. Which is why many expert investors and their consultants deal with the categorisation issue through the creation of a separate ‘alternatives’ allocation within a diversified portfolio – mostly made up of hedge funds. The existing asset classes within the portfolio are then proportionately reduced to take into account the inclusion of alternatives.

As discussed in previous articles, accessing alternatives requires specialist expertise. The skills required to realise the full benefits of alternative investments should always include:

• The ability to assess which opportunities are worth exploring further;
• The ability to perform the required due diligence;
• Experience and industry networks;
• The ability to discern which investments are appropriate for clients;
• The ability to access certain structures and offshore domiciled funds.

Alternative investments increase portfolio diversification.  A diversified portfolio which includes assets with different risk and return profiles is difficult to build.  A diversified portfolio helps reduce overall risk without necessarily impacting expected returns. A single manager fund exposes an investor to idiosyncratic risks associated with a single manager, for example key man risk of investing with a ‘name’ portfolio manager.

Alternative investments provide access to specialist investment opportunities.  Some of the best opportunities are normally only available to sophisticated investors including large pension schemes or endowment managers. In turn most of these single managers are only available to wholesale investors.  A diversified portfolio can provide access to these “best of generation” investment managers with high alpha potential.

Using a diversified portfolio materially reduces single manager investment risk. This is essential given the complexities that are involved in understanding and accessing some alternative investments.

Provided an adviser and the client have agreed on the diversification benefits of utilising alternatives, the most important question is sizing; how much should be allocated to alternatives?

Investment views on allocation weightings vary. Typically, a diversified portfolio can hold between 10 per cent and 35 per cent in alternative investments at any one time of which the largest part is likely to be hedge funds.

Hedge Fund Behaviour

Equity Funds

The term “hedge funds” comprises many different types of investment styles.  As hedge funds invest differently (for example some invest in equities others in options) it’s not easy to group their returns as one.   There is significant risk in looking backwards at how alternatives have performed in the past.  Having said that, it is worth noting that during the GFC many hedge funds dropped in value as they were positioned to capture market upside or they were “net long the market”, however prior to the GFC these funds had performed very well.

Many lessons have been learnt from the GFC, in particular improvements in transparency and liquidity – meaning investors can “see through” into certain investments to ensure an understanding of the market risk or “beta” that they are exposed to.  Additionally, the evolution of liquidity means many high quality equity hedge funds can be accessed on a daily basis – particularly those that are regulated in the US or Europe.

As stated above many investors classify long/short equity funds as “equity”, which really means “market risk” or beta.  This allows investors to seek out outperforming funds “alpha” and the pay the premium for this skill.  These are often mult-strategy funds that can invest across the spectrum.

The primary driver of these improvements is founded on allowing investors a clean exit in the event that the underlying investments fail to perform.  For our firm, this means access to these strategies with the additional benefit of low fees.  If equity markets perform poorly and these funds are net long these funds are likely to underperform historic NAV highs – but potentially outperform the index.  In such an instance the enhanced structural aspects mean investors can go to cash quickly.

Market Neutral

Strategies such as market neutral (where the manager is long and short often in equal measures) should also outperform equities. These funds take advantage of small mispricing between similar or related securities and tend to use leverage to exploit small pricing inefficiencies.

Systematic Funds/ CTAs

Other hedge fund strategies such as systematic funds performed well in 2008; during this time our firm had exposure to systematic funds or “CTAs” that performed well.  Many believe these strategies responded well to the volatility in the market.  Evidence this year indicates that CTAs fail to perform in periods where equity markets are range bound and bonds underperform.  Many had not expected that both bonds and equities would underperform at the same time and as such both CTAs and equities tended to underperform.

This adds complexity in considering the role of CTAs in a portfolio with many international investors remaining cautious that CTAs can provide portfolio protection in all circumstances where equity markets are flat or even falling.

Tail Risk Funds

Tail risk is the risk of outsized losses outside of the normal distribution of returns, some funds are structured to take profits from these outsize events (“tail risk funds”).  During the GFC some strategies performed extremely well, for example tail risk funds which profited from volatility in markets.  However, these funds tend to perform relatively poorly in a rising market; one of the tail risk funds held by our firm in 2008 made a triple digit return whilst equity markets collapsed.  Many of these funds are also described as long volatility.  Generally in a falling equities market, long volatility and tail risk strategies perform well.

Diversified Alternatives

As discussed above a diversified portfolio of alternatives reduces reliance on one particular asset class.  It is rare to find an asset that outperforms in any scenario! Some managers can exhibit these characteristics and charge high fees to compensate for this rare skill.  By investing in a diversified portfolio – in theory the fund should perform well versus a cash benchmark (or absolute return investing) – as opposed to benchmarking against the market. The range of hedge fund strategies is balanced with the objective of providing “all-weather” protection for investors.  The allocations can also be rebalanced during the cycle to adjust the allocations to alpha and beta.

There is no guarantee cast iron or otherwise that investments will perform as expected.  We all know that that past performance is not indicative of future returns.  The alternative to looking backwards is looking forwards. Performance based on an expected set of worked events can of course be modelled although this is more of an art than a science as prescience has not been a widely bestowed gift since the days of the Hebrew prophets.

Summary

On the whole alternative investments can bring lower correlation with traditional asset classes. This means that when blended with mainstream investments they can help to smooth out an investor’s portfolio returns over time (particularly taking into account times of market dislocation).

Investing in a single hedge fund requires deep analysis on the investment strategy and how it can perform across a range of market scenarios. Where advisors choose one or two hedge funds there is a risk that those strategies can respond poorly at times when protection is needed. It’s also a big mistake to classify funds as equity or fixed income solely based on their standard deviation as an indicator of risk.  A CTA for example has a considerable departure form traditional asset class thinking and is a million miles from fixed income in many respects.

Many institutional investors deal with this problem by building a diversified portfolio of alternatives assets with a target weighting often in excess of 10 per cent.  They also use specialists to help build the portfolio.

Building a portfolio of alternative investment requires expertise in understanding complex investment strategies and the ability to undertake due diligence including business risk due diligence.

Select Alternatives Portfolio

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

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Select strengthens its partnership MGD Wealth.

The Select Asset Management Limited group (Select) and MGD Wealth Limited (MGD Wealth) have strengthened their partnership after the addition of a third portfolio, the LDI Connect 20 Portfolio, and achieving the milestone of $100m in total funds under management for the LDI Connect Portfolios, with the first 2 LDI Connect Portfolios, LDI Connect 3 and LDI Connect 7, having been launched in January 2012.

Select Fund Services is the responsible entity for the LDI Connect Portfolios while Select Investment Partners provides implemented portfolio services to MGD Wealth, the investment manager of the LDI Connect Portfolios through its Customised Portfolio Solutions (CPS).

Stephen Furness, Director and Head of Investment Advisory of MGD Wealth, said, “The launch of LDI Connect 20 to provide cash reserves to meet longer term liabilities than envisaged with LDI Connect 3 and 7 and along with the growth of the LDI Portfolios to over $100m in less than 2 years demonstrates the benefit of working with an experienced implemented portfolio consultant such as the Select group where they provide an “end to end” solution. It allows non-institutionally aligned wealth management businesses such as MGD Wealth to compete with the vertically integrated advisory businesses, adding value to our shareholders but more importantly to our clients by aligning them with our Liability Driven Investment process.”

David Yale, Executive Officer and Head of CPS for Select, said, “As with all of our CPS partners, we have structured the LDI Connect Portfolios so that MGD Wealth can offer their clients customised portfolios under their own brand and on their preferred administration platforms, that they control as investment manager, with Select Investment Partners providing them asset consulting and implemented portfolio services.”
The launch of MGD Wealth’s LDI Connect 20 Portfolio added to the earlier releases this year of CPS portfolios by DMG Financial Planning Pty Limited and Stonehouse Financial Services Pty Limited, advised by Select Investment Partners.

Mr Yale said, “We are currently in discussions with a number of other non-aligned dealer groups who are also looking for a new source of valuable and FoFA compliant revenue and/or extensive back office efficiencies with an institutional portfolio management capability that allows them to meet the best interest tests for their clients.” He said, “All of these potential CPS partners are looking for value and differentiation in their investment options for their clients beyond the use of a standard model portfolio implemented inefficiently by individual advisers.”

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Alternative investments find mainstream favour with sophisticated retail investors and advisers

Investors tipping into the alternative investments area.

A roundtable of leading Australian and international investors has today ratified growing interest in alternative investment instruments, saying the sophistication of providers has helped overcome historical obstacles.

Today’s ‘new breed’ investment managers – with a transparent focus on must-have liquidity and global capability – is helping to redefine alternatives as prized portfolio tools for retail investors and financial advisers.

“Australian retail investors lag international peers in respect of their asset allocation to alternatives,” said Winston Capital Partners Founding Partner and Managing Director, Andrew Fairweather.

“So we see strong upside potential to bring the best of local experience coupled with a global specialist. This enables us to bring an institutional quality offer with greater liquidity, transparency and access to investments and strategies not currently available to domestic investors,” he said.

The experts, drawn from specialist investment management group Select Investment Partners and its investment adviser Neuberger Berman addressed a special roundtable to map out the parameters for the ‘new alternatives’ approach.

“Select continued its journey to bring deep, institutional quality investment thinking and capability to retail investors earlier this year with the appointment of Neuberger Berman in an advisory role to the Select Alternatives Portfolio,” said Mr Fairweather.

“Today was a unique chance to hear first-hand perspectives from the investment professionals running the fund. It has helped to explain why Select Investment Partners believes alternative investing in Australia has reached a positive tipping point.”

Dominic McCormick, Select’s Chief Investment Officer, said: “Alternative investment offerings to retail investors today not only have to help diversify a portfolio but they also need to be highly liquid, transparent, value for cost and global in scope.  Select and Neuberger Berman are aiming to bring all these elements together in a high quality package”.

Mr Fairweather, whose firm distributes the Select Alternatives Portfolio, said the partnership of Select with Neuberger Berman is an exciting new partnership that brings unique opportunities to Australian investors.

“The Select approach has been to partner with a global brand in Neuberger Berman, while forging a best of breed investment committee including:

• Dominic McCormick, Chief Investment Officer and a founding partner of Select
• David Bell, current member of Select’s Investment Advisory Panel and consultant to Select;
• Thomas Good, former manager in debt and alternatives at the Future Fund, now an Investment Strategist with Select.”

“Select’s core principles of investor focus, investment rigour and original thinking continue to frame its activities in the Australian market,” he said.

“Neuberger Berman delivers Select Investment Partners significantly increased investment research, market leading technology and deep resources with a far broader reach for the Select Alternatives Portfolio.” Mr Fairweather concluded.

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