Castle Point Funds Management has added carbon credits and peer-to-peer private debt to the asset mix for the $120 million multi-manager 5 Oceans Fund to replace a portion of its traditional fixed income allocation.
In a note to clients last week, Castle Point said: “We have successfully invested in unlisted debt via peer-to-peer platforms in the Castle Point Ranger Fund for some years now and are extending this to the 5 Oceans Fund. In our opinion the slight trade off in liquidity is more than compensated by the higher return.
“Carbon credits, in our opinion, can be a good diversifier with good risk/return characteristics, and a responsible investment option.”
Jamie Young, 5 Oceans portfolio manager, said with government bonds set to offer low yields and little prospect of capital gain for years to come, investors will have to seek alternative assets to fill the task traditionally assigned to bonds.
The 5 Oceans is designed to emulate a multi-asset balanced strategy but with a flexible mandate targeting growth exposure of between 30 to 70 per cent based on how underlying managers assess market risk.
Young said while the standard balanced fund 60/40 split between growth and fixed income assets had worked well in the past the approach was unlikely to provide investors with much return or protection over the coming decade.
“We have to think about what will work for the next decade,” he said.
The 5 Oceans fund invests via in-house strategies for NZ assets along with a panel of external managers for offshore assets. Current third-party managers include T Rowe Price (global fixed income), Daintree (credit), Acadian and Schroders (international shares) and ‘tail risk’ specialist, 36 South.
Castle Point will manage the carbon credits – for now likely to be NZ only – and peer-to-peer debt internally as it “dials down” local fixed income exposure, Young said.
He said the fund would target asset-backed private debt to a maximum level of 10 per cent of the entire portfolio.
According to Young, the 5 Oceans fund aims to add incremental returns via the alternative assets without taking on too much extra risk.
For example, he said the fund has a small allocation to ‘tax deposit’ pools that certain large companies use to cover short-term taxation liabilities.
“[Tax deposit pools] are pretty liquid – and you’re essentially lending to the government – but you can get a much more attractive return than investing in term deposits,” Young said.
The 5 Ocean carbon credit changes take effect on September 1 with the private debt move following a month later, Castle Point told investors.
“We are excited by these changes and are constantly striving in this low interest rate environment to look for ways to deliver attractive long-term returns whilst minimising the risks involved and protect investor capital,” the note says.