QSuper's decision this week to separate its alpha from its beta comes as no surprise to many. Talk of alpha and beta has dominated the conference circuit this year and hardly a day goes by where the editor of Investor Weekly doesn't hear some investment professional or another expounding the virtues of separation.
Alpha-beta separation is the process by which active return (alpha) assets and market return (beta) assets are de-coupled. The aim is to allow the hunt for that elusive alpha to continue, unencumbered by a fund's usual policy for asset allocation. It's all about maximising returns in an increasingly volatile equity market environment.
QSuper executive officer Rosemary Vilgan said separating alpha and beta would help the fund better understand its risks, deliver improved levels of diversification in both active and market returns, improve after-tax returns, and better position the fund to pursue new opportunities. "We are confident this new approach to investment management will result in better outcomes for our members," Vilgan said.
Russell Maddox, managing director of MLIM, which this week won an $85 million mandate from Stevedoring Employees Retirement Fund (SERF) for its portable alpha mandate, agreed these kinds of strategies had attracted a lot of interest from the local institutional market.
"The Australian institutional market now wants to pursue strategies that separate alpha from the beta market exposure. We have received a lot of interest from Australian institutional investors and the major asset consultants," Maddox said. But buyer beware. Skilled managers are hard to find and funds will have to pay through the nose to hire them. It is also important to remember alpha returns can also be negative.
Speaking at this year's Conference of Major Superannuation Funds (CMSF), Stephen Garth, a portfolio manager at Dimensional Australia, made a good point. Garth warned that many funds might think they have effectively bought in alpha, when the reality was that they were actually paying for plain beta. "It's important when you are looking for alpha not to end up with beta in drag," he said.
"You need to benchmark beta not on the overall market performance, but on the correct beta for the specific asset class you are investing in."
He added that separating out alpha and beta helped funds to measure their managers more effectively, but it was important to know exactly what it was you were paying for. "There's no point in paying a lot for an alpha portfolio when you could get the same returns with a low-cost beta portfolio," he said.
QSuper, which has $20 billion in assets, said it planned to introduce the alpha-beta separation strategy over the coming months. "Given the magnitude of the changes, full implementation will take some months, with the portfolios evolving over time as opportunities arise, and new asset classes and strategies are considered," Vilgan said.
