POWERED BY MOMENTUM MEDIA
Costs are paramount in investing in risk premia
As the cost of extracting risk premia in the market remains high while returns have diminished, investors have to be aware of investing in strategies that look good on paper but have execution costs that don’t justify the benefit of implementing those ideas.
Paul Fraynt, vice president and head of risk premia at Franklin Templeton-owned K2 Advisors, had studied the success of risk premia strategies comparing theoretical versus real-world performance after execution costs.
Fraynt said they had found a number of superannuation funds currently invested in risk premia, with those allocations coming down to a classic four-by-four structure.
However, in many of those quadrants, the size of remaining premium versus the costs to extract is a suspect.
“They split the entire investment universe into equities, fixed income, commodities and foreign exchange and that’s by asset class; by style that would be momentum, carry, value and maybe sometimes defensive,” Fraynt said.
“The idea was to find a strategy for each quadrant, so up to 16 different quadrants, and we found in many of those quadrants the source of premia that exist after costs are not justifiable.”
Despite the historical strong performance of risk premia strategies, results and experiences were still mixed when considering the brokerage costs for buying and selling.
Fraynt said their idea was to not just go beyond what people would consider best execution, but by trying to find a better or cheaper way, but at the same time his asset management firm aimed to invest in non-traditional risk premia strategies that were less crowded and worked better.
“What we find is that many of the existing strategies may look attractive in a backtest, but until asset managers can reduce costs dramatically these strategies do not become attractive,” Fraynt said.
“It’s difficult to say if classic risk premia strategies have become attractive or unattractive, but recent experience last year and frequently this year have showed the classic strategies have been suffering or have not delivered attractive returns.”
“What I would be careful about here is that the cost we incur to extract the premium after best execution still does not justify in our minds a desire to include those strategies.”
Recommended for you
Super funds had a “tremendous month” in November, according to new data.
Australia faces a decade of deficits, with the sum of deficits over the next four years expected to overshoot forecasts by $21.8 billion.
APRA has raised an alarm about gaps in how superannuation trustees are managing the risks associated with unlisted assets, after releasing the findings of its latest review.
Compared to how funds were allocated to March this year, industry super funds have slightly decreased their allocation to infrastructure in the six months to September – dropping from 11 per cent to 10.6 per cent, according to the latest APRA data.
TOP PERFORMING FUNDS
ACS FIXED INT - AUSTRALIA/GLOBAL BOND
Fund name
3y(%)pa
1
Spire Oaktree Opportunities XI Second Close
61.07 3 y p.a(%)
2
Spire Oaktree Opportunities XI First Close USD
59.21 3 y p.a(%)
3
DomaCom Lot 21 Chellaston Road Munno Para West SA 5115 Australia
31.73 3 y p.a(%)
4
Fidante Credit Suisse Global Private Equity
30.15 3 y p.a(%)
5
DomaCom 4/27 Crombie Avenue Bundall QLD 4217 Australia
26.71 3 y p.a(%)
