IOOF to shift focus to alternatives

In a market of low returns and interest rates, more and more fund managers are seeking alternative asset classes to generate better returns and IOOF Holdings has declared itself to be one of them.

The group's chief investment officer, Stephen Merlicek, said the group was looking to increase its alterantive asset class positon from around 10 per cent to up to 20 per cent because, when "done the right way (alternatives) can be a solution for out-performance. Done the wrong way and it can have the opposite effect."

When "done well", alternatives generate a five per cent return on top of what the listed market achieves, which is generally eight per cent in the long-term, according to Merlicek. However, the catch is, alternatives have a risk premium and a liquidity premium, but are very active.

He said that with official interest rates around the world and 100 year lows, people often take on more risks to increase their returns, and "that's the danger in this environment".

Merlicek said, "Alternatives can reduce volatility and increase returns, in a very measured and intelligent way". However, alternatives are "constrained by liquidity and fees", which is why the returns are generally higher.

He said, IOOF is looking to expand its alternative asset class position from around 10 per cent, by "up to 20 per cent." He said retail funds tend to invest around ten precent in alternatives and industry super funds invest about 30 to 50 per cent in the class on average.

IOOF's typical alternative investments may include; private equity, hedge funds, infrastructure, agriculture, venture capital, commodities and catastrophe insurance.

Merlicek said alternative fees vary upon the investment, for example, investing in private equity might have a fee of two per cent and an outperformance fee of two per cent, "those fees are very high... but you get access to the best and brightest people."