Mark FAWCETT, CIO at National Employment Savings Trust (NEST), United-Kingdom
Shahril RIDZA RIDZUAN, CEO of Employee Provident Fund (EPF), Malaysia
Pedro Antonio ARIAS, Global Head of Real and Alternative Assets at Amundi
Moderated by: Philippe MUDRY, CEO, Editorial director at L’Agefi
Reaping The Rewards: Integrating Alternative Assets
AIn today’s uncertain economic context, alternative assets, and in particular real assets, are high on the investment totem pole. Pedro Antonio Arias explained that this is due to the fact that real and alternative assets are proven to be more efficient than traditional asset classes in tackling a number of issues. He added, “Part of the reason is also that we are getting much closer to these asset classes — we better understand their weaknesses and strengths. There is no secret that in asset allocation it is becoming mainstream to include — or at least to consider including — real and alternative assets in allocation because they serve and are tailored to serve specific issues.”
Assessing the Risks
Panellists Mark Fawcett and Shahril Ridza Ridzuan both remarked on the risks inherent to real and alternative assets. Mr. Arias agreed that there are indeed a number of risks specific to these asset classes and sub-asset classes. “These are specifics probably not shared by other asset classes, and if you don’t have experts on your side that are capable of following that kind of specific risk, it’s better not to enter in it. But before you on-board that kind of expertise, you need to make sure you have the human resources to follow it, and you need to ensure along every single step of the investment process that you are not creating or generating a risk that you have never heard of before,” he explained.
Balancing Growth And Yield
Balancing the two objectives is tricky, but not impossible, asserted. Mr. Ridzuan. “It goes on to the structure of the fund. The EPF is focused on Inflation +2 percent as one of the on-going targets. The other target that we have is, basically, on an absolute return point of view, part of the social promise in Malaysia, this is a fund we will return, and it is 2.5 percent per annum. So, the way we split our major fund is actually to try and meet these two targets,” Mr. Ridzuan explained.
Mr. Fawcett added, “We are focused on generating growth with relatively low volatility. We don’t need the income at the moment, but as people may be aware, the UK used to have compulsory annuitisation of retirement; we no longer have that, so we are thinking about the need to generate regular income for people in retirement as well, so the emphasis may be shifting.”
With the massive funds ready and waiting to be invested in alternative asset classes these days, especially in infrastructure, the concern for a potential bubble is real.
Mr. Arias highlighted that, beyond the analysis of an asset on its own merits, we must also consider the momentum of the investment. This momentum can be broken down into three stages: 1) the “dry powder”, or the funds collected and ready to be invested; 2) the valuation stretch, compared to the historical valuation; and 3) the potential additional operating income that could be produced by the asset. By combining these three indicators, we can then determine if it is the right moment to look at this particular sector.
Then, it is up to the investor to be as nimble as possible within this difficult environment, in which there is a lot of available funds and a great deal of interest in the same asset at the same time. The investor must seek out the one asset that has is able to provide additional cash flow. “At Amundi, that’s the way we look at it. I don’t like the term bubble, because it implies we had better not invest. Our job is to invest, to play the imbalance between the supply and the demand. If we were to only invest during the good moments, everybody could do it. What we are expected to do, is choose the right asset in a momentum,” Mr. Arias said.
Mr. Fawcett concluded, “I’m not sure that you would call it bubbles, but certainly I think you would see, from time to time, liquidity flow – whether because it is fashionable, or whether because people believe that you can chase an additional return in any particular sub-sector or in any particular asset-class. At the same time, you can say that liquidity flows out and in.”