By Amanda Lin, Portfolio Manager, Omega Global Investors (Omega is the investment manager of the SAVE portfolio).
As a result of the COVID-19 related economic shocks, the world is arguably experiencing the most significant event in modern times. Investors are experiencing significant impacts on investment returns, liquidity and volatility, exceeding the experiences of the GFC.
Simultaneous downturns on the demand and supply sides across every segment of the economy are reaching levels not seen since the Great Depression. For investors in many multi-asset income portfolios, they are experiencing two problems they hoped their portfolio allocations were designed to solve for: Liquidity and Volatility.
During March and April, we have seen investors struggle to buy and sell securities in a timely and cost-effective manner. During the market sell off that started in February 2020, we have seen many managed funds that claim to be liquid, increase their cost for investors to exit the fund. These exit costs are in the form of wider sell spreads which reflect the cost of trading the underlying portfolio of assets. In some instances, the spread increased to as much as 1.8% for investment grade bonds. In other instances, funds that own illiquid assets can have those assets heavily discounted in the market by as much as 30%.
With an investment universe including global listed equities and short dated bonds, SAVE has demonstrated high liquidity. SAVE has two layers of liquidity. Firstly, investors can see the bid and offer on the ASX and secondly the underlying assets are in very liquid public markets. This liquidity is further supported through the manager’s increased transparency by providing the full portfolio’s holdings daily on the Pinnacle aShares website.
It is commonly assumed that equities and bonds share a negative correlation and that when you combine the asset classes together, investors can reduce volatility. Yet, this relationship has failed during times of high volatility and uncertainty. The following chart shows the correlation between global corporate bonds and equities, where the correlation is especially higher during periods of crisis. This results in increased volatility for multi-asset funds that hold both corporate bonds and equities, without being compensated for increased returns.
SAVE is a multi-asset class portfolio that is constructed bottom-up. The advantage of this is that volatility is explicitly considered at the security level and the aggregate portfolio. As examples of this, SAVE can only invest in bonds that have a maturity of less than 5 years, making them less volatile than longer dated bonds. In addition, SAVE invests in shares that produce high levels of consistent income, resulting in lower volatility from SAVE’s share portfolio than the broader equity market. Finally, combining these bonds and shares into one portfolio further reduces the portfolio’s volatility. SAVE is explicitly designed to have a target Beta of 0.5 to its risk benchmark. This means significantly less volatility than international equities. Omega has also seen over recent times, that the Beta has delivered on its target over times of extreme drawdown, relative to its risk benchmark.
The following chart is the annualised volatility of SAVE vs the risk benchmark during the COVID related market meltdown in March 2020, which illustrates this point. The expected low volatility of SAVE comes at the security level rather than a top-down approach. For example, despite more than half of the portfolio allocated to equities, SAVE experienced less than half the volatility of the risk benchmark.
The impact of the GFC lasted for approximately 10 years, while the impact of COVID-19 could be generational. With Governments globally borrowing on a scale not seen since the World Wars to fund businesses and consumers during the economic shock of COVID-19, Omega expects this to reshape the investment landscape. Even with Central Bank support, Omega expects large increases in government and corporate debt will impact investor’s risk and return preferences. Companies are also, revising down earnings and profit forecasts along with dividend expectations. SAVE is ideal for this environment, as it dynamically reweights as market conditions change, focusing on achieving a regular income distribution whilst staying clear of higher risk and lower quality securities. SAVE is actively managed to invest in high quality income generating stocks and minimise credit risks by investing in the highest quality corporate bond issuers, which when combined, produce a portfolio that has similar income levels to global equities but with lower volatility.
 Francis Longstaff (2014) “Valuing Thinly-Traded Assets”, available from National Bureau of Economic Research.
 Beta: Beta is a measure of volatility of return and correlation between returns
 Risk Benchmark: MSCI World ex Australia Hedged in AUD
This communication was prepared by Omega Global Investors Pty Ltd ABN 64 126 331 244 AFSL 318125 (‘Omega’). It contains general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs and is not intended as a recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. A financial adviser should be consulted before making any investment decision.
Pinnacle Fund Services ABN 29 082 494 362 AFSL 238317 (‘Pinnacle’) is the product issuer of the Pinnacle aShares Global Dynamic Income Fund (Managed Fund) ARSN 632 117 303 (‘the Fund’) of which Omega is the investment manager. Pinnacle is not licensed to give financial advice. A copy of the most recent Product Disclosure Statement (‘PDS’) can be located at https://pinnacleashares.com/asx-save/#documents. You should consider the current PDS in its entirety and consult your financial adviser before making an investment decision.
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