July research round-up
PortfolioConstruction Forum asks the major funds research houses for an update on the state of the market and their most recent projects.
Lonsec
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Since the global financial crisis (GFC), the behaviour of banks in Australia and overseas has reshaped the way investors source income from their investments, according to Lonsec. Banks have been the major beneficiaries of these investment flows, via the humble term deposit.
However, term deposit rates in Australia will drift lower, Lonsec writes in a recent Perspective, and the case for term deposits comprising a significant component of a defensive investment portfolio will become less compelling. -
Given the dislocations and upheaval in global financial markets since the GFC, active fixed income managers are better placed to add value than they have been for a number of years, according to Lonsec. “While it is true that the fee load on index funds is cheaper, in the case of Australian fixed interest funds, the difference is little more than 10 basis points,”
Lonsec notes in its latest income sector review. “With the exception of Macquarie True Index (which delivers the exact return of the index without regard for fees), index funds are aiming to deliver the benchmark return less fees of around 0.26 to 0.29 per cent, whereas the average active Australian fixed interest manager aims to deliver the benchmark plus 0.5 to 1 per cent before fees of around 0.40 to 0.51 per cent. Similarly in global fixed interest, passive index style managers aim to deliver the benchmark minus fees of 0.31 to 0.34 per cent versus active management fees from 0.45 per cent.”
In addition, Lonsec observed that some of the highest buy/sell spreads were applied to index style funds.
Mercer
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Constructing portfolios with in-built levers to control potential inflation and deflation outcomes is a critical aspect of portfolio construction today, according to a new paper from Mercer. The research house argues that to effectively protect against deflation or an inflation breakout, portfolios need to be flexible and ready to a tilt to a more diverse range of assets.
While there is a good argument for diversification into inflation/deflation hedging assets (precious metals, property, infrastructure, commodities, timber/agriculture), Mercer notes many of these assets are quite expensive currently. Real estate and infrastructure, though not the most explicit hedges, are probably the most reasonably priced at present, the researcher believes.
Standard & Poor’s Fund Services
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• Investors are demanding more competitive offerings from the alternative strategies multi-asset sector, according to Standard & Poor’s Fund Ratings’ latest review of the sector. The classic fund of hedge fund model – offering investors a diversifying set of alpha managers, albeit at a higher cost and with reduced liquidity – is being challenged, especially where performance has been poor, the report observes.
“Some products using single-manager multi-strategy and active multimanager models that incorporate tactical exchange-traded fund [ETF] and index-like allocations have outperformed the alpha manager fund of hedge fund model,” the report notes.
S&P added it expects offerings that fail to compete in terms of active oversight, transparent risk management, product-level liquidity, and competitive fees to lose out to the growing competition from newer funds designed from the ground-up to deliver on these features.
Van Eyk Research
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Art investment funds are steadily increasing in size and might soon become a mainstream alternative asset class, according to a new report from van Eyk. While the number of art funds whittled down dramatically after the GFC, it has begun to increase once again. “In absolute terms, art is a real asset,” according to van Eyk.
“As gross domestic product and the economy grow, so does the value of artwork; art assets are often mispriced, allowing for ‘buy and hold’ strategies; art is not susceptible to inflation, acting as a natural hedge; and, classic art works by historically famous artists often hold tremendous value given that they cannot be recreated, providing good diversification against other financial assets.”
On the downside, art investments are often illiquid and expensive, limiting the ability of the average investor to gain exposure, there is no regulator, and art does not produce a cash flow. - Van Eyk has appointed Matthew Olsen as head of ratings, effective immediately. Olsen will lead a team of 12 analysts covering van Eyk’s investment research efforts. Olsen joined van Eyk in January 2011. Van Eyk’s head of research, John O’Brien, will move to focusing on van Eyk’s strategic research unit including its investment outlook and strategic asset allocation research, as well as sitting on the Blueprint Investment Committee.
Zenith Investment Partners
- Zenith has launched an investment consulting division, Zenith Investment Solutions, which will grow the researcher’s existing tailored investment solutions for financial advisory firms via model portfolios, investment committee services, fund selection and asset allocation advice. In addition, it will offer product solutions advice to advisory firms looking to establish their own products, and offer a range of consulting services to fund managers. The management of Zenith’s existing adviser research website and research report suite will also fall under the management of this division.
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