Looking across the asset classes

Our next speaker is Chris Hesterlow, investment specialist at Alan Gray.

Chris joined Alan Gray in 2019 as a research associate before moving into the relationship manager role in 2020.

Chris's presentation topic today is looking across the asset classes.

Welcome to the presentation, Chris.

Thanks so much, Angelina.

Yes, today we're gonna be talking about asset classes.

We're gonna be talking about multi-asset portfolios and specifically the Alan Gray Australia Balance Fund, which is our offering in this space.

Before we get underway, I should mention that anything said today is general in nature, doesn't take into account the viewer's personal needs, objectives or circumstances.

If you do need personal advice, I would encourage you to seek the assistance of a qualified financial planner.

So today we'll cover asset class performance over the years.

We'll discuss why a balanced fund may be worth consideration and we'll look at the Alan Gray Australia Balanced Fund and how it differs to other balanced funds.

And then we'll get into some performance and positioning regarding that Alan Gray Balanced Fund.

So we'll begin with why

balanced funds or multi-asset portfolios exist.

And this chart from Morningstar does a good job of helping us to understand the reason that we want to be exposed to a broad range of asset classes.

And balanced fund and multi-asset portfolios will generally have a range of different asset classes.

So things like Australian and global equities, Australian and global bond positions and cash.

And this chart from Morningstar shows the performance of different asset classes on the calendar year basis

going all the way back to 2004.

And so each of the assets are color-coded at the bottom.

What we can see is really not much of a pattern at all.

So if you pick a particular color and follow it across from left to right, you can see the results are really all over the place.

The dark green and the dark blue and the light blue, which are the equity exposures, do feature quite a bit more toward the top row, as you might expect.

But on the other hand, they're also the worst performers or the second worst performers across a number of years across that period.

What we want to do is have exposure to a broad range of asset classes in our portfolio so that when one area underperforms, that underperformance is at least somewhat cushioned by stronger relative performance in other areas.

That's what we mean by diversification.

And as Harry Markowitz once said,

Diversification is the only free lunch when it comes to investing.

So that's what we're trying to do in a balanced fund.

We're combining a range of different asset classes, generally with a bit of a bias towards equities, as they'll usually be the primary driver of long-term returns.

We have a broad range of asset classes in our quest to achieve both income and capital growth for our investors.

You know, there's no point being

completely exposed to the riskiest and highest growth asset class, typically being equities, if an investor can't handle that volatility and ends up selling at the worst possible time when there's been a market downturn.

In doing that, you're really crystallizing a loss which can be difficult to come back from.

And so in order to avoid that happening, these multi-asset portfolios can have different exposure to growth assets and defensive assets.

and that can reduce volatility overall and help investors stay invested for the longterm and achieve good outcomes.

In terms of how these balanced funds usually look, some of them do have quite a fixed exposure to those different asset classes that we've discussed.

So some multi-asset portfolios may have 50% in growth assets being equities or shares in companies and 50% in fixed income or bonds

They might have 60% in equities, 40% in defensive or 70, 30, but we think there's actually quite a better way to go about doing things than having a very fixed allocation.

And that is to have a very flexible fund that can move capital towards the most attractive opportunities at any one time.

And so in our balanced fund, our benchmark is 60% growth assets, 40% defensive assets,

but we have a lot of flexibility around that.

And so our equity exposure can range from as little as 40% all the way up to 90%.

Our fixed income exposure can range from 10% up to 50%.

And we can also have up to 10% exposure in commodities, such as gold.

In addition to those tools or exposures, we can also use derivatives to hedge market risk when we deem it appropriate.

So we're not using derivatives to add risk, we use it to hedge out.

market exposure when we deemed that appropriate to do so.

And we can also use things like forwards to manage currencies in a very targeted way.

In terms of why the Alan Gray fund may be worth consideration in investing into the fund, you do get exposure to our contrarian fundamental and long-term investment philosophy.

And when I say contrarian, what I mean is, you know, we see our role as

looking at those companies that are out of favour or undervalued by the broader market.

Generally, they have some sort of negativity around them and they might be exposed to a commodity that's at cyclical lows.

Other investors might be fed up with the management team.

For whatever reason, we spend most of our time researching and concentrating on those stocks because we think it's the best chance we have of purchasing a company at a discount to its true or intrinsic value.

And so this graph on the screen is a little bit of a stylized way of viewing that.

In the gray bar, you can see our assessment of intrinsic value, which is what we employ our analysts to try and determine.

And we seek to purchase or enter shares when their price is trading below that assessment of intrinsic value.

And often that happens when there is quite widespread pessimism around a stock.

On the other hand, we then look to exit companies when it reaches our independent assessment

intrinsic value.

We don't try and ride the wave of optimism that can come after that point as others begin to get excited about a certain stock or area.

In terms of how the funds performed, since inception these numbers are to the end of January.

We've matched our composite benchmark

That may not sound that impressive, but it actually is quite difficult to keep up with a composite benchmark that assumes a daily rebalancing with absolutely no transaction costs, which is not really feasible in the real world.

We do think we can beat this high hurdle that we've set for ourselves and we'll continue to seek to do so.

Over the three-year period, the funds performed well and outperformed its composite benchmark.

Contributing to that performance has been our positioning in the fixed interest space in recent years.

You know, if we wind the clock back a few years, we saw fixed interest as largely offering return free risk.

Interest rates were at historic lows across the globe.

They were even negative in some nations like Germany.

And so rather than take on a whole lot of duration risk, the team was underweight bonds at that time.

And the bonds that we did have were much shorter duration than the index, which is a measure of interest rate sensitivity.

Instead, we had more exposure to commodities, hedged equities, and different defensive assets at the time, shorter duration bonds.

And that cushioned the negative impact of rising bond yields, which led to falling bond prices that I'm sure most investors are familiar with.

More recently, we have lagged our composite benchmark

over the past 12 months.

Last year saw a significant return to share price trending.

And by that, what we mean is the winners continuing to outperform or a fairly momentum led market.

On average, the largest and most liquid shares outperformed within their respective sectors, both in Australia and overseas.

And that can be a tough environment for a contrarian investor because we spend our time looking at those things that are out of favor.

we remain underweight large and mega per cap stocks overall.

To have a look at what we are doing in the fund, you can see our exposures to different asset classes on the left-hand side and with some more detail looking at regional exposures on the right.

At the moment, we are underweight net equity relative to our composite benchmarks or fairly conservative positioning at 55% versus the 60% of our benchmark.

We do have

We have hedged out quite a bit of our global equity exposure to bring that net exposure down to 55%, which should provide some cushioning if markets were to be weaker from here.

In terms of the fixed interest exposure, we don't have much in the way of global government bonds or corporates.

We do have quite a bit of exposure in treasury inflation protected securities, which are currently offering us around a 2% real yield, which we think is

quite attractive in this environment for our defensive component.

If you'd like to find out more, you can jump on our website.

There's a number of fact sheets there and information around how you could potentially invest.

Thank you for your presentation, Chris.

Do you have time for a few quick questions?

Sure, sure.

How is ESG integrated into your investment process?

Yeah, so we take a bit of a different approach to some.

Some firms exclude out large parts of the index or will not invest in particular companies.

We really look at it through mostly a valuation lens.

So the value of any company is its future earnings or cash flows it will generate for us as owners discounted to today.

And if a company was to lose its social licence to operate or it's doing the wrong thing on, you know, E, S or G,

that is likely to impact the profits it will make for us as owners.

And so that's what we spend a long time analysing and factoring into our valuation when we're looking at these companies.

It may lead to us requiring a greater margin of safety when we invest, which is the gap that I referred to earlier between where we see the fundamental value of the business and the price that we're paying for it.

How does the analyst team combine their individual stocks into a balanced fund?

Yeah, so it is again a bit of a different approach.

Many multi-asset portfolios that are offered by a funds management business will just take a bunch of existing products they already have, whether it be fixed income, Australian equities, global equities, and put them together, package them up and sell it as a multi-asset portfolio.

Ours is built from the bottom up.

So every fixed interest exposure and every equity exposure is held at the security level.

And we think that's quite a good way of doing it as it allows capital to flow quite freely to the different asset classes that are available.

And so on the fund, the lead portfolio manager is Simon Marwini, who's based here in Sydney.

He has a team of, or is in a team of nine analysts who are performing the Australian research.

and he works with Alec Cutler, who's head of the multi-asset team at our sister company, Orbis.

He has a well-resourced team, and Simon and Alec together compare different investment opportunities, both in Australia and overseas, and build that portfolio together from the bottom up.

So that's how we put the portfolio together.

Thank you, Chris.

Thanks so much for having me.