Advisers need to apply three ‘stress tests’ to any fund manager’s offering, says Pengana Capital head of distribution Damian Crowley.
The first is correlations to the equities markets and to the other major asset classes including bonds and listed property, says Crowley.
“There are different drivers in the market, so different assets can perform differently under different scenarios.”
Understanding how a client’s portfolio might perform under different economic scenarios will assist advisers in structuring more outcome-based portfolios. It is also important to look at these correlations over a reasonable timeframe; ideally including the GFC to ensure these correlations were maintained.
The second stress-test is separating the returns from funds into alpha and beta components.
“Beta is the return from the market, alpha is the return from the skill of the fund manager,” says Crowley. Understanding how much of the return for each fund is beta or market related and how much is alpha or skill based and not market-related, is critical.
The third stress-test is asking how active is the fund manager is, or whether the fund is truly “benchmark-unaware”.
“The benchmarks capture everything, so they’re reflecting current market capitalisation, not necessarily the best investment opportunities at that time or quality and value metrics,” says Crowley.
For example, he says, the bond indices reflect countries with the most debt, “which is precisely what you don’t want in a portfolio at this point in time”.
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