Exclusive interview with Alex Cathcart, Senior Portfolio Manager, Drummond Capital Partners
Global Investment Insights
with Alex Cathcart, Senior Portfolio Manager, Drummond Capital Partners
Alex Cathcart is a Senior Portfolio Manager at Drummond Capital Partners, where he contributes to their strategic and tactical asset allocation processes, and portfolio construction.
Alex has 18 years’ experience as a portfolio manager and economist.
In this exclusive interview with Global Investment Institute, Alex discusses the differences in portfolio construction between managed accounts and superannuation funds, the main constraints they face when investing and how they manage risk, how they value unlisted assets and ensure valuations are reliable and timely, where the best relative value opportunities lie in the current investment landscape and solving for retirement.
Q. What would you highlight as the main areas of differentiation between managed accounts and superannuation funds in terms of their approach to portfolio construction?
A. We operate more like a boutique fund manager than a super fund. While many large organisations need to structure teams and processes to reduce silos and generate a total portfolio approach, we are a small team who operate as one cohesive unit. A total portfolio approach is much easier when you sit one metre away from the manager research team.
We are less peer aware than the super industry. Part of this is unavoidable as we have two peer groups we benchmark ourselves against (managed account providers and retail super funds) who are quite different. We are also not caught up in Your Future, Your Super.
From a portfolio construction perspective, we have no issues with capacity, both with respect to allocation into smaller cap areas of the market and with moving the portfolios around. In line with the latter and less peer awareness, we tend to make comparatively high conviction moves in the portfolios. Our Strategic Series portfolios can be +/- 10% growth exposure and we can, and have, used those full ranges.
Q. What are the main constraints you face when investing and how does that influence the way you manage risk?
A. In managed accounts we have different constraints to pooled funds. Because the end investors are the beneficial owners of the individual assets, there are no derivatives in the portfolios and they must be built with listed securities (including ETFs) and platform fund menus.
Our primary portfolio suite is also entirely built with daily liquid funds, though we have launched Australia’s first semi-liquid managed account which allows our clients access to a blended portfolio of private market assets.
We also have less control over execution than a pooled fund. Platforms execute portfolio changes for managed funds over a day or two. This hasn’t been too much of a constraint from a tactical perspective, our TAA time horizon is 1 – 12 months.
Q. How does your organisation value unlisted assets and ensure valuations are reliable and timely?
A. To gain access to unlisted investments we invest in semi-liquid evergreen Australian unit trusts and therefore do not directly value unlisted assets. Unlike closed-end funds, semi-liquid funds are generally majority invested in unlisted assets but may take applications and process redemptions on a monthly, or quarterly basis, therefore, timely valuations are more critical.
Considerable time is spent assessing and monitoring the valuation processes of the fund managers we invest with. We want to see transparent, timely, and robust valuation practises with adequate independent input and governance structures. The methodology will often reflect the underlying asset class, but in general we expect some level of listed markets input.
Given semi-liquid funds also have the potential to gate or limit redemptions, if managers were slow to reduce their valuations in a period of heightened volatility and depressed listed markets, this may encourage investors to front run and redeem from a fund. This additional risk means it is critically important to understand the manager’s valuation approach and timeliness.
Q. Where are you looking for best relative value opportunities in the current investment landscape? (Listed vs private markets? Domestic vs global? Traditional vs alternative assets?)
A. From a longer-term perspective, we believe in US exceptionalism (though Trump has taken some of the shine off) and the equity risk premium.
We also think for some unlisted assets the illiquidity premium is now negative, investors are paying a premium to smooth their volatility. We are also sceptical that within equities that there is still a risk premium to be received for owning the value/small factor.
In line with this, in our portfolios we have more US/global equity exposure than a pure valuation approach would suggest. We also have few alternatives (hedge funds etc) in our portfolios given we have more faith in the equity risk premium than alternative risk premia or the ability for a fund to generate idiosyncratic alpha.
Over our tactical horizon, we think investors will continue to follow earnings growth, and large-cap US tech has done an amazing job of delivering on that front. In line with this, we are modestly overweight in global equities versus Australian equities, which are extremely expensive for a market delivering no earnings growth. We also have a strong preference for Australian floating rate investment grade credit given relatively good returns for comparatively low risk. We think the path of deficits in the US and other countries will be problematic at some point and as a result we hold limited global government bond exposure, despite the normalisation in yields post 2022.
Q. As the transition to retirement unfolds, how are you solving for retirement to offer relevant solutions and building appropriate portfolios that deliver desired outcomes for retirees?
A. We believe that advice solves the retirement problem and all of our end investors are advised. In line with this, we don’t see our role as building mass market off the shelf products and portfolios. Rather, we see our role as building portfolios and advice tools that our advisor clients can use to deliver better retirement outcomes for their clients.
We recently launched a web-based retirement income calculator which allows advisers to input their client’s personal circumstances and generate stochastic retirement income paths taking into account things like drawdown preference, portfolio allocation (including bucketing), time horizon, age pension integration, and bequest desire. Because this is a probabilistic rather than deterministic tool, our hope is that it will help facilitate better client conversations and retirement outcomes by giving retirees confidence to spend their income in retirement. Most retirees are more comfortable spending an amount that is consistent with a 75% or 90% chance of not outliving their portfolio than a 50% coin flip.
Alex Cathcart, Senior Portfolio Manager, Drummond Capital Partners
Alex has 18 years’ experience as a portfolio manager and economist. As portfolio manager Alex contributes to Drummond’s strategic and tactical asset allocation processes, and portfolio construction.
Alex previously spent 3 years at Cbus Super as a senior member of the asset allocation group responsible for strategic and dynamic asset allocation across the multi-asset portfolios. Prior to Cbus, Alex spent 5 years in the investment strategy team at QSuper. Alex was responsible for developing econometric structural models of major global economies, alongside the dynamic asset allocation and risk positioning frameworks. Prior to QSuper Alex spent almost 6 years as a senior economist at Queensland Treasury.
Alex is a CFA Charterholder, B.Bus - Economics (1st Class Honours) and B.Arts/B.Bus at the University of Southern Queensland.
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