Transparency is key for alternatives

PQ:If a wealth manager cannot do sufficiently in-depth monitoring by themselves, they need to ensure they have someone else with the right skill set’ Marcos Camhis, FOS Asset Management

‘Many clients are used to investing in bonds which can be held to maturity as long as they continue to do their job in the portfolio. ‘ Izabel Moura, Brainvest

The relative lack of transparency in alternatives is widely cited as perhaps the biggest hurdle facing wealth managers with an interest in investing.

‘Transparency is absolutely vital in this area, because there can be a distinct “information deficit” in many areas of alternatives,’ said Marcos Camhis, CEO of FOS Asset Management.

Nevertheless, he points out, the industry has shifted to create more transparency in certain areas. ‘The more you go towards the listed and/or regulated end of the spectrum, the more transparency you will get. By contrast, if you choose to move towards offshore, unregulated vehicles, then it’s essential you have adequate due diligence and monitoring capability,’ he said.

Private equity and private debt, in particular, need careful scrutiny, he stressed. ‘These are long-term vehicles investing in unlisted assets in different jurisdictions. If a wealth manager cannot perform sufficient in-depth and continuous monitoring by themselves, they need to ensure they appoint someone else with the right skill set,’ he said.

The lack of standardised historical return data makes due diligence more difficult, he stressed. ‘Performing due diligence on private equity is more a question of understanding the underlying investments, and the way exits take place,’ he said. ‘With no mark to market valuation, investing becomes a question of how much you put in, how much you can get out and how quickly,’ he said.

In addition, the phased nature of most private equity investments – with staged drawdowns at irregular intervals – makes ongoing scrutiny a necessity. ‘If you invest, say, 30% of your commitment in a private fund,  and then find out it is not turning out as planned, you have to stop investing good money after bad. It’s no good realising after the full 10-year period has elapsed,’ Camhis said.

Izabel Moura, investment specialist at Brainvest, also stressed the need for external expertise if a wealth manager does not have the in-house specialist capability. ‘In the alternatives space, the dispersion of returns is much wider. We have long-standing operating partners in each individual field (real estate, private credit, specialty finance, venture capital etc.)  who help us with sourcing and analysing deals within their specific areas of expertise. We also delegate to them the management of certain strategies and opportunities.

In cases of longer lock-ups or substantial financial exposure, for example in real estate investments, Brainvest will aim to be part of the board of directors and/or the advisory committee of each investment vehicle. ‘This means we are closer to the manager and the strategy with higher transparency and a certain degree of control. To sum up, high corporate governance levels and alignment of interests are key,’ she said.

For other long-term time horizon investments, she agrees with Camhis that listed investment vehicles can be useful as a way of achieving transparency and liquidity. In her opinion, long term time horizons are not necessarily a problem for clients: ‘Many clients are used to investing in bonds which can be held to maturity as long as they continue to do their job in the portfolio. So while we have the option with a listed holding to sell out, we don’t necessarily view that as a key aspect of the position,’ she said.

Learning from the past

The watershed moment for alternatives, as for pretty much every asset class including cash, was 2008.

‘In 2008, all the masks came off,’ Camhis said. ‘Everyone wanted their money back. So, it is vital to understand the liquidity of different aspects of your portfolio, and to understand the effect liquidity can have on asset pricing in squeezed markets,’ he added. ‘Investors need to avoid being hostages to a drawdown. There will be periods of underperformance, during which you have to know where to assign the blame.’ This understanding is key to all active asset allocation, he points out: ‘In many ways, it’s the flipside of realising the person who has made stellar returns following the S&P for the last decade is not a genius.’

Perhaps the key lesson, he added, is to make sure clients understand what they have invested in.

The importance of understanding how your portfolio might perform under various different stresses is also emphasised by Michele di Michelis, CEO of Frame Asset Management: ‘A lot of strategies faced both the financial crisis of 2008 and the European crisis of 2011. Some of them were able to help investors protect their portfolios. It’s correct to say that it is really important to check portfolio details to better understand what kind of risk you would be exposed to in various worst-case scenarios. Of course, black swans are unpredictable by definition, but it’s important keep in mind different black swans when you are in the asset allocation stage. A single black swan might wound you, but two or three together can kill you,’ he said.