Searching for Diversification

Simon Wilson | PE Global FX Alpha Fund

We are currently experiencing an extended equity market cycle. While there has been much debate as to when the upward trend of equities will end, this is something that is difficult to forecast. Instead of trying to forecast something that is beyond our control, we can alternatively focus on building robust portfolios that have the greatest probability of achieving client’s longer-term objectives. Diversification within an investment portfolio can help achieve a more consistent long-term absolute return profile with lower drawdowns than equity indices. Allocating to investments uncorrelated to equity markets, meaning investments that have the ability to deliver returns irrespective of equity market direction, is one of the best ways to achieve diversification.

Alternative investments are a diverse and evolving universe of strategies that do not share the same risk and return characteristics as traditional bond and equity investments, making them ideal candidates for diversification. There is a large number of potential investments, each differing significantly in terms of market maturity, liquidity, exposure to equity market risk, as well as many other factors. There is a world of opportunities, but each potential alternative investment requires individual assessment to ensure it meets broader portfolio objectives. How do we get started? A clear criteria by which to evaluate your investments is a good place to start.

Key criteria to consider when selecting alternative investments as part of a diversified portfolio

  1. It has a low correlation to traditional asset classes, such as equities and bonds, due to the underlying drivers of return being unique and independently sourced
  2. The liquidity profile of the investment matches the client’s liability needs
  3. The investment improves the overall risk/return profile of the portfolio

A number of different strategies can be employed in order to achieve the above criteria, a common one being investing in different markets such as currency markets. Currency markets can move independently of equity and bond markets because they are often driven by different factors. Currencies can be influenced by different monetary or fiscal policies in different countries, the shape of relative yield curves and the dependence of certain currencies upon the price of commodities and economic momentum.

Investing in currency markets can bring a new source of uncorrelated risk and return to investors’ portfolios, however it is important to look for an investment manager with extensive experience navigating these markets. One that has a clear and disciplined investment rationale, a proven ability to generate alpha over the long term while effectively managing the additional associated risks of investing in these markets.

Macquarie Professional Series brings the P/E Global FX Alpha Fund to Australian Investors

In 2017 Macquarie Professional Series (MPS) launched the P/E Global FX Alpha Fund, which accesses the investment capabilities of P/E Global LLC based in Boston. MPS started in 2004 with the aim of providing Australian investors access to differentiated investment solutions that can make a real difference to their portfolios.

P/E Global LLC (P/E) is a specialist currency manager that aims to provide investors with uncorrelated, absolute returns to traditional asset classes via a disciplined and dynamic quantitative model. It was founded in 1995 with the underlying investment philosophy that ‘Factors drive currency markets and that the importance of these factors can be identified using a systematic statistical process’. Underlying this is a belief that the relative influence of factors changes over time, and this influence can be identified and exploited to generate returns.

Strong Long Term Performance

Since 2003, P/E has achieved a return of 10.4% per annum in AUD (after all fees), outperforming the Australian equity market by 0.9% per annum over the same period. The chart shows the cumulative performance of P/E against that of the ASX300. The light blue shaded areas highlight the significant drawdowns of the ASX 300. In each case P/E generated strong positive returns.

As a measure of its power to diversify traditional portfolios, P/E has achieved, a correlation to equity and fixed income markets, of close to zero since 2003. Importantly P/E has a correlation of -0.3 in down equity markets; demonstrating its potential to protect investors’ capital when they need it the most. The P/E Global FX Alpha Fund offers daily liquidity and is available on the PowerWrap platform. It sources its alpha from the movements of fifteen currency markets based on seven underlying factor drivers.  

This is general information only and does not take account of investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Funds. In deciding whether to acquire or continue to hold an investment in a Fund, you should consider the Fund’s product disclosure statement, available at the links above or by contacting us on 1800 814 523. Past performance information is not a reliable indicator of future performance.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.