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Advisers should avoid alpha clusters

Advisers can take advantage of valuation disparities in the markets, but must keep diversification in mind to limit correlated alpha clusters in investor portfolios, according to Antipodes Partners.

A key way advisers can take portfolios to the next level using active management is to consider growth stocks on a sector basis, rather than staying region or country-specific, Antipodes Partners deputy portfolio manager Andrew Baud said during a markets presentation in Sydney today.

“But we limit our correlated exposures to a cluster of less than 15 per cent based on the known risks that we can identify about those stocks because you’ve also got to be aware there are a lot of unknowns that you could potentially be exposing yourself to,” Baud noted.

“Hence why you’d want to limit those correlated alpha clusters.”

He added while both long and short opportunities exist in the market, short plays must be properly managed due to an unlimited number of unknown risks.

Antipodes believes investors are still overpaying for structured growth, he said.

“Price dispersion or price volatility has been low, but it’s now starting to pick up, which is the kind of market we prefer, given our active tools,” Baud said.

“Valuation dispersion is still quite high, which is great for a pragmatic value investor; we’re still finding opportunities both long and short.

“Ultimately we’re looking for a margin of safety through multiple ways of winning to get those asymmetrical risk/reward opportunities.”

Pinnacle Investment Management distribution director Matt Dell highlighted the distinct change in the tastes and preferences of advisers and investors.

“There’s a clear demand for alternative structures both on platform and off platform, and the platform market is changing as a result,” Dell said in relation to Antipodes’ new actively managed exchange-traded fund.

“It is the end of an incredible bull run.

“It’s fair to say that volatility has returned, arguably markets are fully priced, although we’re finding some areas are very overpriced and overvalued, though at Antipodes we are still finding pockets of good value.

“So this is really the time, more than ever, for active management.”

He said Antipodes’ philosophy has been successful in generating absolute returns in excess of the benchmark, but below market levels of risk.

“We consider the margin of safety, so your starting valuation is very important, and the multiple ways of winning, which is the business resilience and not relying on any one factor going right for your investment thesis to work,” he noted.

“And lastly, the diversified sources of alpha, so that’s the specific focus on risk management and [avoiding] clusters of alpha.”

Antipodes Partners last week appointed Andrew Findlay as its new managing director and announced the launch of an actively managed exchange-traded fund, also known as an exchange-quoted managed fund, which will further enable SMSFs and other retail investors to access its capabilities.

The global manager holds $7 billion in funds under management and is supported by multi-affiliate investment firm Pinnacle Investment Management.

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