"In a low return environment, every basis point is going to count": Q&A with Parametric's Chris Briant July 2018

Cbriant

As super funds use up their tax losses from the GFC, tax expense is starting to re-emerge as a big cost. In this kind of high-cost, low-return environment, funds are looking for new ways to maximise returns, without taking on increased risk. To meet this demand Parametric Australia has recently teamed up with California-based Research Affiliates to launch a new alternative institutional investment strategy to Australian investors. The strategy is called Systematic Alternative Risk Premia, or SARP and we spoke to Parametric Australasia CEO Chris Briant to get more detail on the unique approach and find out how successful it has been in other markets. Chris also shared with us a message for all fund members.

Can you explain the investing methodology?

We buy attractive (and sell unattractive) securities in terms of their carry, value and momentum characteristics, and we do that in a low-cost, liquid and transparent way.

Can you describe in more detail the Value, Momentum and Carry investing factors used in the product?

These are tried and tested factors, that have been researched extensively for decades. Value pays off when you get longer-term mean reversion, Momentum pays off when shorter-term price trends continue, and Carry gives good returns if prices stay the same. They don’t all work in all asset classes all the time, which is why we have combined them as we have.

How does it work across all the asset classes it covers?

Those three factors are exploitable across all asset classes, but all three aren’t going to be firing up for all asset classes, all the time. The diversification of factors and asset classes reduces risk and improves expected returns.

Is it an overlay or a separate investment mandate for institutional investors?

It’s an actual fund product that funds can invest into, and it can also be delivered as a separate mandate for institutions that want something completely custom.

Is it a strategy already used in other markets? What made you bring it to Australia?

Yes – it’s been offered in the US since May last year, and we have had really pleasing early take-up over there. We brought it to Australia because it delivers exactly what Australian funds are searching for right now; the expectation of improved returns, but with less exposure to sharemarket risk. This is something that hedge funds have long promised, but in many cases not delivered. The further problem with hedge funds was that in most cases they were expensive, hard to get your money out of, and ‘mysterious’.

Is this kind of product lacking in the Australian market?

We have a few competitors in this space, but where we stand out is the depth and quality of research that’s gone into our strategy and, importantly, its implementation. Time and time again, we at Parametric see frictions getting in-between a good investment idea and what ends up in the member’s pocket. It was critical to us when developing this product, to ensure we minimised those frictions

What do you think is the next big thing in investment market products?

I think the whole area of investment efficiency is the next big thing for funds to explore, because in a low return environment, every basis point is going to count. An example of a strategy that improves a fund’s efficiency is Tax-Managed Centralised Portfolio Management (CPM). This isn’t a new idea; we’ve been doing it overseas (where it’s widely adopted by taxable funds and their investment managers) for 16 years, and in Australia for six. Funds leaving the trading to individual managers who don’t have line-of-sight across the whole fund (and even if they did, might not have the skill or incentive to maximise after-tax returns) doesn’t make a lot of sense. In the last year, we’ve seen renewed interest in CPM, from funds and from their managers.

If you could say one thing to each fund in Australia, what would it be?

I’d urge funds to add something like “We believe that a focus on implementation efficiency will increase our members’ retirement incomes” into their Core Investment Belief statement. That would embed efficiency into every decision made by the fund, and hopefully ensure that frictions didn’t get between good ideas and the member.

View Chris Briant's profile Read more about the Systematic Alternative Risk Premia