By Jayson Forrest - Managing Editor  - IMAP Perspectives

In his position as Head of Investments at Ironbark Asset Management, Peter Tiffin is involved in identifying managers, in both traditional and non-traditional asset classes, that he thinks will capture alpha. This includes the ‘alternatives’ sector.

“The alternatives sector can be considered as a possible solution to fixed income and trying to generate some yield,” Peter says. “In this space, we’re looking at mid-market listed infrastructure, and we’re currently very interested in Chinese government bonds and Chinese convertibles.”

Peter believes alternatives should form part of any diversified portfolio. However, he concedes that some alternative strategies can be difficult to understand and warns advisers that if there are managers they are considering using that cannot clearly explain their process, then walk away and find another manager whose process you can understand.

To help Ironbark better understand the processes used by its managers, it divides alternative managers into three categories: growth managers, defensive managers, and managers providing uncorrelated returns.

“In the growth group, we look at those managers whose biases, structures and processes are likely to give you returns that are directionally similar to equities, and one of those is corporate debt,” he says.

“In the defensive group, these managers move in a different direction to the equity market, like tail risk hedging and long/short managers. And the third group of managers are those providing uncorrelated returns, which include macro managers.” 

Peter explains that as part of its screening process of managers, Ironbark insists that managers provide a clear and concise explanation of their framework, which enables Ironbark to compare the manager within its categories and how each is performing relative to its peers and benchmark.

“It’s an approach that works for us, so I recommend advisers find managers that can explain their process in a way they can fully understand, which then allows advisers to confidently explain the process to their clients.”

However, while Peter concedes that alternative strategies can be difficult for some retail investors to understand, he is also confident that there is a growing range of sophisticated investors at the retail level.

“We’re already seeing advisers talking to sophisticated investors who fully understand and appreciate, for example, delta hedging, and there are products that are suitable for this type of investor. Likewise, there is a whole range of clients who really just want to have something that protects them from an equity downturn and reduces portfolio volatility, and there are a range of alternative strategies suitable for these clients,” Peter says.

“Therefore, it’s important that advisers match the product and strategy to the specific needs of clients. If you’ve got sophisticated clients who require complex alternative strategies, then there are a wide range of opportunities available. But if you have clients with low incomes, then perhaps a simpler strategy that the client can understand is a better choice for them.” 

Challenger is best known in the market for its annuity products, which provide investors with financial security in their retirement. And when it comes to retirement income stream strategies, Challenger offers a range of different investment solutions, including guaranteed and non-guaranteed options.

According to Challenger Head of Technical Services, Andrew Lowe, one of the most significant risks that retirees are exposed to in a low or zero rate environment, is the “real risk” of running out of retirement income.

“When assets become depleted, the risk of running out of income is very real for retirees,” says Andrew. “This is the retirement danger zone. The prospect of living on $37,000 per year, which is the maximum rate of Age Pension for a couple, or $24,500 for a single, is tough.”

According to Andrew, Challenger is seeing advisers increasingly using tools, strategies and investment products to blend different income streams to help address this risk. He adds that one of the best ways advisers can do this is with a guaranteed lifetime income solution.

“If we were to allocate an amount into a lifetime income stream, we can effectively lock in a layer of income over and above the Age Pension, which effectively addresses essential spending requirements. So, irrespective of what happens in investment markets or how long a client lives, we can guarantee a reliable income stream for clients in retirement,” he says.

“This is another non-traditional approach to protecting investor income in retirement that advisers should consider as part of their approach to portfolio construction.”

Nigel Crampton is Head of Managed Accounts at Milliman.

Peter Tiffin is Head of Investments at Ironbark Asset Management.

Andrew Lowe is Head of Technical Services at Challenger.

They spoke on defensive portfolios as part of an IMAP specialist webinar series on ‘How to meet defensive portfolio goals’.

The session was moderated by Michael Karagianis - Senior Consultant at JANA Investment Advisers.