By Jayson Forrest
William Morgan (Atrium Investment Management) and Matt Swieconek (Findex) share their thoughts on using illiquid assets, such as property and infrastructure, as part of an allocation within a portfolio.
For advisers considering real assets, like property and infrastructure, as part of an investment allocation within a portfolio, William Morgan — Portfolio Manager at Atrium Investment Management — believes these assets, including private markets, can all play an important role in bringing greater diversification to any portfolio.
While Atrium invests in listed real estate and infrastructure, it’s not averse to investing in unlisted infrastructure, says William.
“We see a lot of client opportunities coming through which are outside traditional institutional style infrastructure assets, particularly in renewable energy and the transition of the energy network,” he says. “We are identifying opportunities that are allowing us to hit our return on equity expectations. We do this by using our ‘illiquidity budget’ to access parts of the market that are not readily available through the rest of our multi-asset portfolio.”
Joining William in a webinar about ‘allocating to property and infrastructure’, which was part of an IMAP Specialist Webinar Series on ‘Property and infrastructure: Defensive assets or troubled outlook?’, Matt Swieconek — Head of Investment Relations at Findex — reveals that as part of Findex’s allocation to its multi-asset portfolios, it typically allocates 9 per cent to property and infrastructure, and 14 per cent to alternatives, with these assets remaining relatively static in its model portfolios.
“We’re not envisaging large swings or tactical adjustments away from these allocations. Instead, the tactical adjustments we typically make are in our allocations of bonds and equities,” says Matt. “So, property, infrastructure and alternatives are all used to provide us with lower drawdown characteristics, more stability in our portfolios, and uncorrelated returns. These assets do provide us with a great deal of diversity when it comes to uncorrelated returns, and much smoother returns over a period of time.”
He adds: “If you look at the drawdown characteristics, particularly of unlisted assets and alternatives, I believe clients will forgive us for missing a few points on the upside, so long as we’re not wearing the full downside risk when the market falls, and that’s precisely what these assets are designed to do.”
Matt Swieconek - Findex
William Morgan - Atrium Investment Management
If you look at the drawdown characteristics, particularly of unlisted assets and alternatives, I believe clients will forgive us for missing a few points on the upside, so long as we’re not wearing the full downside risk when the market falls, and that’s precisely what these assets are designed to do
Managing conflicts
Atrium and Findex have both successfully created vehicles to access illiquid assets — such as property, infrastructure, and alternatives. But how do they manage the conflicts that arise from being both a portfolio manager and an investment manager?
“It’s an interesting questions,” says Matt. “When incorporating products into portfolios that we’re involved with, we need to ensure that everything we do is in the client’s best interests. Whenever we are seeking to bring a solution into our managed accounts — we have $9.5 billion that sits on a MDA — we might bring in some investment products where we act as the responsible entity, and where we place a unit trust into these structures.
“However, that’s only done where there is an opportunity that we can take advantage of, either offshore or in the institutional market that we can’t get access to in the retail market. That’s because, at the end of the day, we are investing on platform.
“For example, if you look at our set of strategies for alternatives, these aren’t strategies you can easily access in the retail market in Australia. But they do serve a purpose and perform very well,” says Matt. “So, when managing conflicts, everything we do is in our clients’ best interests. We are very comfortable knowing that we are fulfilling that obligation.”
When investing in individual assets, Williams says this requires strong due diligence to not only fully understand the assets, but also to work with the asset manager in order to deliver the required outcome. Today, Atrium is fundamentally an allocator of investor capital, which means it is very focused on ensuring it acts in the best interests of the portfolio and for investors.
“Outside of the fee associated with the fund, there are no fees connected to the asset or the transaction. Everything is done at arm’s-length because fundamentally, we are acting on behalf of our investors. And while this has always been the case, it’s true that when you mix the allocator function and the asset manager function it can get quite muddy. We have resolved that by making it very clear that Atrium is an allocator.”
William also adds that Atrium constantly seeks out the best opportunities available in the market. “We’ve got the benefit of having a much broader capital base, which provides us with the ability to access a wider array of markets that allows us to build our investment diversification. But it also enables us to build very meaningful relationships with the asset managers.”
We made a conscious decision to use illiquid investments when structuring our products. That has allowed us to be more granular with control over the portfolio. We tell investors: ‘Don’t give us your money unless you’re prepared to lock it away for a period of time. By doing so, we will try and reward you with consistent returns that are diversified from what you’ll get from listed markets
Investors and capital lock-up
For investors committing to relatively illiquid assets, like property and infrastructure, it essentially means they are locking up their capital for a period of time. At Atrium, William says investors can face a five-year plus lock-up of their capital.
“We made a conscious decision to use illiquid investments when structuring our products,” says William. “That has allowed us to be more granular with control over the portfolio. We tell investors: ‘Don’t give us your money unless you’re prepared to lock it away for a period of time. By doing so, we will try and reward you with consistent returns that are diversified from what you’ll get from listed markets.’
“However, our structures do accommodate for situations where if an investor does have a change in circumstances and they desperately require their capital for a valid reason, then we can facilitate that,” says William.
As part of the framework of Findex’s multi-asset portfolios, Matt says there is enough income generation to provide investors with a satisfactory amount of liquidity, should they require it. As part of its property and infrastructure strategy, exposure to listed and unlisted assets is set equally at 50/50, which includes listed and unlisted infrastructure securities.
In terms of the income generation within Findex’s listed portfolio, a minimum of 50 per cent of the income or the EBIT generated comes from the likes of recurring property rental. In addition, a minimum 50 per cent of assets need to be located in Australia.
This 50 per cent exposure to listed assets in its property and infrastructure strategy, does provide Findex with the ability to provide clients with a reasonably liquid vehicle. However, Matt concedes there are some investment opportunities Findex misses out on due to the managed accounts structure, which is unable to cater for those opportunities, particularly with unlisted investments.
“When investing in property and infrastructure, you need to set the expectations of clients from the outset that this is a long-term investment which will lock-up their capital for five, seven or eight years plus. Clients need to understand they won’t be able to access their capital for that period of time,” says Matt. “We can manage that to an extent within managed accounts via the liquidity of A-REITs and cash. But there may be some single assets that clients want to take up that we just can’t currently cater for within the managed accounts structure.”
When investing in property and infrastructure, you need to set the expectations of clients from the outset that this is a long-term investment which will lock-up their capital for five, seven or eight years plus. Clients need to understand they won’t be able to access their capital for that period of time
At the end of the day, what we’re talking about here are real assets. These are the types of asset you can drive to, you can see, and you can directly experience — like shopping centres or toll roads. These are tangible assets, so people generally understand them
Investor understanding of illiquidity
When it comes to the level of understanding clients have about illiquid assets, like property and infrastructure, William believes most investors already have a good grasp of these asset classes.
“At the end of the day, what we’re talking about here are real assets,” says William. “These are the types of asset you can drive to, you can see, and you can directly experience — like shopping centres or toll roads. These are tangible assets, so people generally understand them.
“However, the underpinning drivers of investment returns — valuation, profit, growth, and risk — are more nuanced with illiquid assets. So, when it comes to better understanding these types of assets, it all comes down to the level of engagement advisers or clients want to have with them.”
Ultimately, when it comes to investing, Atrium prefers to promote the portfolio style approach. That’s because while many advisers do have the scope to invest their clients’ capital into single asset syndicates or single asset opportunities, this is really only appropriate for investors who can handle the volatility of the investment journey.
“Instead, we tell advisers and investors coming into our portfolio that we will aim to give them a smooth return journey that is built upon the fundamentals of diversification,” says William. “We try and take them on a journey with us. “
At Findex, Matt says it’s rare for clients to want to undertake a ‘deep dive’ into illiquid assets, and explore all the individual holdings and syndicates of its portfolios.
“Property and infrastructure are asset classes that resonate with people, and which they tend to have a better understanding of,” he says. “We engage with our managers monthly, and our advisers are fully briefed on any changes that may have occurred within our portfolios. So, should they need to, advisers are equipped with the latest knowledge and information to talk to their clients.
“But generally, in an environment where you’ve got 20-25 different instruments in a portfolio, it’s rare for clients to really drill into a single asset in order to understand what sits underneath that.”
About
Matt Swieconek is Head of Investment Relations at Findex; and
William Morgan is Portfolio Manager at Atrium Investment Management.
They spoke on ‘Allocating to property and infrastructure’ as part of an IMAP Specialist Webinar Series on ‘Property and infrastructure: Defensive assets or troubled outlook?’.
The session was moderated by Toby Potter — Chair of IMAP.