TGM offers new solution to volatility concerns

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Tactical Global Management has launched a new strategy for Australian investors to take a lot of the volatility out of their equities portfolios. Given TGM’s pedigree in currency and multi-asset overlay management, the strategy seems to be ideal for the increasingly important retiree demographic.

Dr Peter Higgs, the firm’s London-based founder, was back in Australia recently talking to super funds and other clients. The ‘TGM Low Volatility Equities Strategy’ is an overlay which is aimed at “taking out the potential big hits” that equities portfolios sometimes get, he said. “It delivers similar returns without the short-term volatility… It allows investors to increase their equities exposures while limiting their risk.”

TGM, which is still based in Brisbane where Higgs founded the company in 1997, has about A$30 billion under management. It was a pioneer in the 1990s of tactical asset allocation overlays and funds, when that was a strong trend.

The firm was an early-adopter boutique which fell out of the old Suncorp Investment Management, where Higgs was the main investment professional in the early 1990s. At one stage, when Mercer was much more influential than now and decided to put all of its clients into TAA (tactical asset allocation) strategies and funds, TGM owned about 50 per cent of the market.

The Suncorp business was ultimately bought by Tyndall, now a part of the Nikko global funds management group, but prior to that Higgs had accepted the former Legal & General in Australia as a cornerstone investor. L&G was acquired by the Colonial Group who in turn was acquired by the CBA. Not long after that the opportunity emerged to buy out the cornerstone investor and TGM has been an independent asset manager since 2004. From a business perspective, his journey has been a bit of a rough road post the GFC which, at last, seems to be heading for the highway.

Given the global nature of its investment strategies, Higgs decided to decamp from Brisbane with his then-young family in 2000 to London, where he and his family still reside. The chief executive, Stephen Goode, and most of the staff remain based in Brisbane.

Because it is designed as an overlay, the low-volatility strategy is very flexible as to how it can be applied. It can, for instance, be combined with a specified underlying equity ETF exposure, including the ability to receive franking credits (as long as they last). In fact, the strategy can be applied to any underlying portfolio of equity investments, including Australian or international equities.

Higgs says that “The strategy is based on option replication strategies enhanced using insights from our global macro research.” It also incorporates machine-learning techniques, although this is not the most important aspect of what drives its success. “Machine learning is good if it’s intuitive, but it’s not the key,” he says. “This, also, is not about traditional market timing. It’s about a long-term protective strategy. Investing in equities over a long-time horizon is known to be one of the best ways to achieve wealth targets. This allows you to do that in a more palatable way, especially as you approach, or are in, retirement when so-called ‘sequential risk’, is much more significant.”

In recent years, Higgs has also taken the company down the path of sustainability. Personally, he’s gone much further than that, investing his own time and money into what he calls “sustainable impact investing”. He is working on “peace and stability”, with Interpeace in Geneva on launching peace bonds to fund post-conflict projects, “education and health” with Wellers Impact that Higgs also Chairs who work with charities in Africa on commercial building projects, and “renewable energy” with a new heat battery technology. TGM also supports these initiatives where appropriate on behalf of clients.

Back to the new low-volatility strategy: implementation over an Aussie equities portfolio, more than doubles the Sharpe Ratio (risk/return profile). It gets to the same or similar outcome, without all the hiccups along the way.

– G.B.

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