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Funds eye a ‘polar vortex’ of volatility

We’re now living through the end of a three or four decade long secular trend, and the strategies that have worked for super funds might no longer be as effective. But that’s what makes the job fun.

It’s not taken long for big investors to come to terms with what’s happening in the markets. While fear was running the show just yesterday, super fund investment teams are now dusting off that old adage: with volatility comes opportunity.

“Put a lot of smart people in the room and ask them to solve some difficult problems, like investing for the long-term, we often have a tendency – because we’re taking risk on behalf of members – to worry about what could go wrong and we tend to get caught up talking about the challenges,” Australian Retirement Trust (ART) head of strategy Andrew Fisher told the AIST’s Superannuation Investment conference on Wednesday (June 15).

“Yes, there’s an awful lot of scary things going on but that’s very quickly being priced in… We’ve taken a bit of pain in the last three months, but it hasn’t been that painful, really. And it sets us up for a much better investing future going forward. I think there’s going to be a lot more volatility around outcomes – but that’s what makes our job fun.”

Inflation-linked bonds are very attractive; a deflation hedge rears its head in the Japanese yen, which is as cheap as it’s ever been; forward-looking returns look “reasonably good”. And one of the problems with traditional portfolio diversification – that bond yields were so low that you weren’t getting any benefit –  is disappearing with rising interest rates.

“But it really is going to be critical what that level of inflation is going to be,” Fisher said. “I think we’ve seen the evolution of increased use of real assets in portfolios. If you go back 30 years ago, to the advent of that diversification, there’s one thing in a higher inflation environment that’s really beneficial, and that’s actually having those real assets in there.”

“Central banks are talking tough at the moment, but if they ease back and we get a higher level of entrenched inflation, that’s bad in general for real returns. And at that time, there’s nowhere to hide.”

Some external managers have noticed super funds growing increasingly interested in cryptocurrencies over recent months. They’re presently restrained from investing in them due to the massive tracking error they’d be taking on, the associated lack of a YFYS benchmark, and the meagre long-term performance data – not to mention the ongoing cryptocurrency “polar vortex” that Nadine Chakar, global head of State Street Digital, describes.

“It’s very hard to find somebody that’s neutral about cryptocurrencies,” Chakar said. “Either you’re for it and think it’s going to change the world and the way monetary policy is administered… or you think it’s just a whole bunch of code. Either it’s zero or to the moon.

But Chakar believes that cryptocurrencies are now emerging as a “fifth asset class” – they’re definitely not too big to fail, but they’re too big to disappear. Non-traditional fund managers are moving into the space, which isn’t just cryptocurrencies, but the entire infrastructure that supports them. Still, the things that some people believed about cryptocurrencies are now being proven wrong.

They haven’t acted as a good hedge against inflation, and they’re not as uncorrelated as their proponents claimed; in fact, cryptocurrencies have mostly behaved like tech stocks in the current market sell-off. For all those reasons, they haven’t found a fan in Mark Rider, LGIAsuper chief investment officer.
“Looking back… it has gone from a dollar up to $22,000. But the point about it is what’s its value?” What is it going to invest in the portfolio, and what’s its value? Like most assets they don’t go in a straight line – they rally on the rumour and sell-off on the fact. When the fact came through in inflation going up, bitcoin came off.”

“With a lot of these technologies and innovations you get a multitude that quickly boils down – Bitcoin very much has the lead on that, along with Ether. But for me I don’t just want to indiscriminately buy it because I like the story. I want a sense of the value and what the return potential is… Given it’s our member’s money, I don’t want to be experimenting.”

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