NZ investors have retreated from alternative asset classes with most funds in that category shrinking over the last year, according to the latest Melville Jessup Weaver (MJW) quarterly investment survey.
Of the dozen or so alternative products captured in both the 2018 and 2019 June 30 MJW figures, total funds under management (FUM) fell from about $2.6 million to $2.2 million over the year.
And the $1 billion plus Milford Asset Management Active Growth Fund – lumped into the category by dint of its absolute return targets – accounts for almost half of the MJW alternative sector FUM.
While the Milford fund grew about $30 million over the 12-month period, other alternative products offered by Salt Funds Management, Nikko Asset Management, NZAM and Aberdeen Standard Life fell considerably.
In fact, the Standard Life absolute return fund lost almost all of its NZ clients during the year as FUM sank from $78 million to less than $1 million. Salt’s long-short fund fell by more than half, reporting FUM of $121 million at June 30 compared to $275 million 12 months previously.
Likewise, the Nikko multi-strategy product (managed by JP Morgan Asset Management) dropped from $178 million in June 2018 to $55 million a year later. NZAM – now under new ownership – also saw both its Alpha and Global funds slide to $7 million ($21 million in 2018) and $179 million (from $226 million) over the year.
The AMP Capital global multi asset fund (managed by Schroders) declined from $282 million to $227 million during the 12-month period. However, the range of Mercer products in the MJW alternatives bucket held steady over the year while the Castle Point Ranger fund grew from $55 million to $84 million.
But the lack of appetite for alternatives among NZ investors could be the sign of a general uncertainty about how to protect portfolios against regime change in the current unusually low interest rate era.
Ben Trollip, MJW principal, says in the June report that investor concerns about crash protection “are not new questions”.
“Investors have been pondering how to prepare for the ‘next crash’ almost since the trough of the global financial crisis [GFC],” Trollip says. “Unfortunately, there are few compelling options. Defensive equities are expensive (at least relative to history), cash is yielding very low rates of return, and true alternative sectors, such as hedge funds, are costly and/or pose liquidity challenges.”
He says since the GFC hedge funds have been highly-correlated to equities, which could either be a sign of rational asset allocation or “an expensive way” to invest in shares.
“Time will tell which narrative is right,” Trollip says. “However, for now, investors are faced with a tough choice as to how to adequately protect their portfolios.”
He says the sovereign bond asset class “remains the best diversifier” given its continuing negative correlation with equities.
Despite the simmering investor concerns, the MJW KiwiSaver data, included in the quarterly report, shows most providers have made few changes to asset allocations over the year.
Although, among the KiwiSaver growth funds, one provider has significantly dialed back the risk. The MJW figures show the Kiwi Wealth fund has cut overall exposure to growth assets from more than 92 per cent in June 2018 to about 82 per cent this year.
The shift has seen Kiwi Wealth reduce its global equities exposure from almost 83 per cent to just over 74 per cent (still 20 per cent more than other KiwiSaver funds in this category) and slightly reduced alternatives from 6.1 per cent to 4.4 per cent.
In exchange, Kiwi Wealth increased the growth fund allocation to NZ bonds from 0.8 per cent to 3.6 per cent during the year while shifting almost 8 per cent to global fixed income compared to zero in June 2018.