“Specialty” is a term we use to describe a category of investments that does not easily fit with the other asset classes of cash, fixed interest, property or shares. Other terms used for this group are “alternative investments”, “hedge funds” and “absolute return funds”. What’s behind the names?
The hallmark of specialty funds is the pursuit of absolute returns - that is, the quest to generate positive returns and defend gains in both falling and rising markets. Specialty fund managers make the reasonable assumption that there are many ways to generate capital growth in markets other than depending purely on asset appreciation as traditional investments do.
The driver of alternative investment performance is not asset appreciation, but the skill, expertise and actions of managers. By combining specialised knowledge of markets and clear investment processes, managers aim to identify and successfully exploit various market inefficiencies and opportunities. Given the confidence hedge fund managers must have in their strategy and investment process, they typically commit a significant portion of their own net worth to the funds they manage.
The inclusion of even a single hedge fund in a portfolio of traditional assets tends to result in lower portfolio volatility (risk) and increased returns, i.e. improved risk-adjusted returns.
The alternative investment market is one of the fastest expanding sectors of the financialal world having grown by 25% per annum for the last 10 years. In value terms, it is currently estimated to be worth in the region of US$500 billion, compared with an estimated US$75 billion in 1990.
In recent years, an increasing number of specialty funds has become available in New Zealand. Capital Financial Planning has used this fifth asset class in portfolios for more than ten years and we are seeing building awareness of the benefits.
OM-IP is one of the specialty investments we use. It was first offered in August 1997 with the most recent being OM-IP Series 8 which closed in October last year. OM-IP invests in over 100 international markets using more than 90 specialist international fund managers. The OM-IP 220 Series uses “programs” provided by a UK-based firm, Man-AHL, part of the larger Man Group.
Man Group employs over 1,900 people in 15 countries, with key centres in London, Pf?ffikon (Switzerland), Chicago, New York, Paris, Singapore and Sydney. Man’s origins are in James Man's cooperage business founded in 1783.
There are two main Man programs in the OM-IP range: Man AHL Diversified and the Glenwood Multi-Strategy. AHL trades in more than 100 global derivatives markets, from stock and bond futures to currencies, oil, gold and grain. It uses a systematic approach looking for trends in prices.
Man-Glenwood invests in a range of other distinct strategies. It does not manage investors' funds directly, rather it allocates funds across a range of strategies and selects between 80 to 100 specialised hedge fund managers expert in the utilisation of these strategies.
The OM-IP range of funds recorded an average increase of 9.8% in December 2002. In Australian dollars since August 1997, OM-IP 220 has had a cumulative return of 155.1%.
If you are not a Portfolio client of Capital Financial Planning and would like more information about Specialty investments give us a call on (03) 379 1913 or 0800 444 999.
If you have over NZ$350,000 to invest and want truly impartial advice, contact us to find out how we can put your money to work to fund your important goals.
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