By Nick Hedley
New Zealand-based investment manager Kiwi Wealth has
seen strong returns from its allocations to trend-following strategies and
other alternatives in recent months – partially offsetting the broad pullback
in equities and bonds.
The Wellington-headquartered firm, which manages NZ$9.4
billion (US$5.8 billion) in assets as of February 28, has sought different
return drivers because bonds have not been acting as defensive portfolio
diversifiers of late, says Chief Investment Officer Steffan Berridge, who was
promoted from acting CIO in December.
Instead of raising its exposure to fixed income assets – particularly
those with longer maturity profiles – Kiwi Wealth has been making allocations
towards liquid alternatives and private assets, Berridge told Markets Group.
It has backed diversified macro trend-following managers that
target macro trends in energy and agricultural commodities, bond futures, currencies
and other assets, partially in an effort to mitigate tail risk.
While stocks and bonds have mostly been reeling, these strategies
delivered returns of around 30% in the first half of the year. In particular,
the ISAM Systematic Trend fund generated returns of 34%, while the Man AHL Pure
Momentum fund yielded 75%.
In a recent research note, Graham Robertson, head of client
portfolio management at quantitative investment manager Man AHL, said the
significant outperformance of trend-following strategies this year “should not
come as a surprise.”
“After all, we are seeing the presence of strong trends in
futures markets, which are sensitive to macro-economic themes such as inflation.”
These strategies tend to do well in times of volatility,
including in high-inflation environments, and “history shows that
trend-following can potentially do well after a period of inflation too,”
Robertson said.
Berridge agrees, saying “it’s just about time in the sun for
these strategies.”
Kiwi Wealth is also adding to its private equity holdings, particularly
in New Zealand’s tech sector, according to asset allocation strategist Peter
Urbani.
It is taking a low-risk approach and is taking advantage of
preferable tax dispensations for local assets, Urbani said.
Overall, Kiwi Wealth’s liquid alternatives portfolio – which
comprises about 5% of its KiwiSaver Growth fund – was up 15% in first half of
the year.
On the other hand, its equity portfolios followed global
markets lower, barring some value-focused strategies. The wealth manager is
predominantly invested outside of its home market but has been building higher
allocations towards New Zealand equities, partly thanks to the allure of tax
incentives for local investments.
Nevertheless, it sees more opportunity in the country’s
private markets, where it is targeting returns in the range of 15%.
Urbani explained that Kiwi Wealth’s investment philosophy is
aimed at managing risk – a strategy designed to deliver stability while sacrificing
little on returns. In contrast, some institutional investors still aim to
maximize the mostly backwards-looking Sharpe ratio.
Kiwi Wealth primarily uses active investment strategies and
believes the current market environment spells opportunity for active
management. It tends to blend value and growth strategies.
Meanwhile, Berridge said Kiwi Wealth has been adjusting its
benchmarks after eliminating weapons, tobacco groups, and companies that derive
more than 15% of their revenues from fossil fuels from its portfolio.
In many respects, New Zealand is a first mover in
responsible investing. The country was thought to be the first in the world to mandate
portfolio screening in a core part of its retirement savings scheme – KiwiSaver
default funds – and to mandate reporting aligned to the Task Force on
Climate-Related Financial Disclosures (TCFD). TCFD-aligned reporting will start
in 2024.
Kiwi Wealth’s global portfolios have moved away from the MSCI
All Country World Index, and now uses a screened index from the Solactive
Global Benchmark Series. Kiwi Wealth expects this benchmark to perform in line
with the MSCI benchmark – but with 20% less carbon intensity.