Understanding the risks of alternatives crucial

Aware Super head of portfolio management Simon Warner said that alternative investments favour investors who have a thorough understanding of the asset class and the capacity to weather any downturns.

“My belief is nothing comes for free,” he told ifa ahead of his session at the Adviser Innovation Summit 2024, for which Aware Super is a gold partner.

“Advisers must make sure that they and their client understand the risks, and that there is a chance of loss with these investments. Because they’re riskier and have higher expected rates of return, they come with an associated possibility of loss.”

Due diligence is paramount when making recommendations to invest in these assets, with Warner urging advisers to seek help from portfolio managers.

Furthermore, he said well-advised investors who can form a long-term view are better placed to capitalise on the opportunities presented by alternative investments.

“Clients who need liquidity and want a predictable portfolio need to be careful,” Warner flagged.

“But for others, these asset classes are interesting and can be beneficial to the whole portfolio.”

Interest has been growing in how alternative investments could boost portfolio performance amid rising interest rates and inflation and mounting geopolitical tensions.

Asset managers have been pitching alternatives as effective tools for portfolio diversification, inflation hedging, and resilient performance.

Warner said Aware Super has been increasing its allocations to alternative investments for a long period of time and well before the impacts of COVID-19 was evident.

The core tenets of its approach to investment are having a long-term horizon and being diversified, which alternatives and private or unlisted investments offer, he added.

“Because our members have a longer view, we have the capacity to take prudent risks to drive superior returns,” Warner said.

“We use alternative investments to seek new investment opportunities and sources of return. Importantly, we can use this to build a robust and diversified portfolio that is not concentrated in any particular area and allows us to increase our expected return over the long term.”

For example, Warner explained, a private credit portfolio should be well diversified and broad-based because it is riskier than public credit in some instances.

“But it is also a source of return that can’t be accessed through traditional listed markets,” he said.

“Our private equity program is focused on investing in companies that are not listed. It is also invested in managers who are employing strategies to increase returns that are outside the normal strategies that you can employ in listed markets.”

A recent study by State Street found that Australian institutional investors are decreasing their investment risks as a result of the current economic environment by increasing their allocations to private credit.

State Street’s global head of hedge commercialisation and head of alternatives solutions (APAC & MENA) Eric Chng told ifa’s sister publication InvestorDaily that the firm has seen a shift among Australian investors from private equity to other private market asset classes – 57 per cent compared to 46 per cent in the APAC.

Warner also commented on Aware Super’s partnership with the Adviser Innovation Summit this year, that they are eager to educate advisers at the event about how their clients could invest in the current economic environment.

“We’re keen to share what we’ve learned with advisers in the spirit of educating them and improving everybody’s outcome,” he concluded.

To hear more from Simon Warner about how advisers can educate their clients about alternative investments, come along to the Adviser Innovation Summit 2024.

It will be held on Tuesday, 4 June at Telstra Customer Insights Centre Sydney, and Thursday, 6 June at Zinc at Fed Square, Melbourne.

Click here to buy tickets and don’t miss out!

For more information, including agenda and speakers, click here.