Isaac Poole, Oreana Private Wealth
“We believe there will be a recession in the US in 2020,” Poole told FSA. “Since the US is still the largest and most important economy in the world, it is going to be a global recession.”
The best protection against the downturn and any periods of volatility before then is diversification, which Poole calls “one of the great free lunches within investing”. For him, it means not only owning different asset classes, but “having truly differentiated drivers of returns that act in uncorrelated fashion through the cycle”.
Poole joined Oreana in May this year from Willis Towers Watson in Hong Kong. He’s been looking to strengthen the diversification of client portfolios by adding alternatives, even though they already constitute a substantial portion — 20%-25% of the firm’s strategic asset allocation.
Alternative asset classes may not deliver outsized returns when equities rally, but they reduce volatility throughout the investment cycle, he noted.
“Building up capital allocation to them means that when the recession does hit and equities fall, we’ll have a really solid buffer protection against the beta of equity downturn and the beta of high yield downturn.”
Alts under-appreciated?
Liquid alternatives, which Poole is focusing on, is a very broad term and not a well-defined asset class. They could be multi-asset funds, total-return funds, long-short funds and global macro hedge funds. “There is an extremely broad universe of alternatives out there that has not been tapped so well in Asia,” he said. “I’m looking to change that.”
“We’re specifically looking at things that will be low risk in a high-risk environment,” Poole said.
Over the long term, such products provide stable, low volatility returns, around 5%-7%. “They haven’t been very sexy in the past,” Poole said. “They don’t look amazing in terms of returns, but they look great from the risk-adjusted basis, and when you get a bear market or [high] volatility, they do the job and help protect the downside.”
Among the variety of alternative products, Poole said he liked global macro hedge funds, unconstrained type vehicles that can be long and short across different asset classes.
“We’re also looking at adaptive multi-asset type funds that can allocate across different asset classes but are long-only,” he added.
Poole is also interested in slightly more illiquid products tapping trade finance, credit finance and reinsurance premiums.
“The fund managers we turn to are experts in a specific field of credit finance and they’re out there looking to build portfolios of loans that will perform well through the cycle,” he said.
Before recession hits
In the run-up to the expected 2020 recession, US equities are expected to perform very well, according to Poole. “You get an M&A spurt, earnings tend to be quite robust because the growth cycle pushes them higher before interest rates get too high,” he said.
To benefit from that, Oreana’s portfolios have a modest overweighting to equities, focused on the developed world, in particularly the US and Japan. “These are the good places to be for the next couple of years,” Poole said.
Emerging markets have taken “a bit of a walloping recently”, Poole said, but he still likes them, especially emerging Asia more than non-Asian emerging markets.
“We think their external balances look better. Their central banks have slightly more firepower to protect the currency movement.”
The firm is underweight investment grade bonds, especially those with high duration (sensitivity to changing interest rates) as well as treasuries.
Unlike those of many investors in the region, Poole’s portfolios are underweight high yield bonds.
“Over the past seven or so years, high yield has performed in equity-like fashion,” he said. “But in downturns it doesn’t give you downside protection like treasuries or investment grade bonds, so we’ve shifted to an underweight in high yield credit.”
