The Alternative Strategies that Have Delivered for Kiwi Wealth Amid the Market Sell-off

By Nick Hedley

New Zealand-based investment manager Kiwi Wealth has seen strong returns from its allocations to trend-following strategies and other alternatives in recent months – partially offsetting the broad pullback in equities and bonds.

The Wellington-headquartered firm, which manages NZ$9.4 billion (US$5.8 billion) in assets as of February 28, has sought different return drivers because bonds have not been acting as defensive portfolio diversifiers of late, says Chief Investment Officer Steffan Berridge, who was promoted from acting CIO in December.

Instead of raising its exposure to fixed income assets – particularly those with longer maturity profiles – Kiwi Wealth has been making allocations towards liquid alternatives and private assets, Berridge told Markets Group.

It has backed diversified macro trend-following managers that target macro trends in energy and agricultural commodities, bond futures, currencies and other assets, partially in an effort to mitigate tail risk.

While stocks and bonds have mostly been reeling, these strategies delivered returns of around 30% in the first half of the year. In particular, the ISAM Systematic Trend fund generated returns of 34%, while the Man AHL Pure Momentum fund yielded 75%.

In a recent research note, Graham Robertson, head of client portfolio management at quantitative investment manager Man AHL, said the significant outperformance of trend-following strategies this year “should not come as a surprise.”

“After all, we are seeing the presence of strong trends in futures markets, which are sensitive to macro-economic themes such as inflation.”

These strategies tend to do well in times of volatility, including in high-inflation environments, and “history shows that trend-following can potentially do well after a period of inflation too,” Robertson said.

Berridge agrees, saying “it’s just about time in the sun for these strategies.”

Kiwi Wealth is also adding to its private equity holdings, particularly in New Zealand’s tech sector, according to asset allocation strategist Peter Urbani.

It is taking a low-risk approach and is taking advantage of preferable tax dispensations for local assets, Urbani said.

Overall, Kiwi Wealth’s liquid alternatives portfolio – which comprises about 5% of its KiwiSaver Growth fund – was up 15% in first half of the year.

On the other hand, its equity portfolios followed global markets lower, barring some value-focused strategies. The wealth manager is predominantly invested outside of its home market but has been building higher allocations towards New Zealand equities, partly thanks to the allure of tax incentives for local investments.

Nevertheless, it sees more opportunity in the country’s private markets, where it is targeting returns in the range of 15%.

Urbani explained that Kiwi Wealth’s investment philosophy is aimed at managing risk – a strategy designed to deliver stability while sacrificing little on returns. In contrast, some institutional investors still aim to maximize the mostly backwards-looking Sharpe ratio.

Kiwi Wealth primarily uses active investment strategies and believes the current market environment spells opportunity for active management. It tends to blend value and growth strategies.

Meanwhile, Berridge said Kiwi Wealth has been adjusting its benchmarks after eliminating weapons, tobacco groups, and companies that derive more than 15% of their revenues from fossil fuels from its portfolio.

In many respects, New Zealand is a first mover in responsible investing. The country was thought to be the first in the world to mandate portfolio screening in a core part of its retirement savings scheme – KiwiSaver default funds – and to mandate reporting aligned to the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD-aligned reporting will start in 2024.

Kiwi Wealth’s global portfolios have moved away from the MSCI All Country World Index, and now uses a screened index from the Solactive Global Benchmark Series. Kiwi Wealth expects this benchmark to perform in line with the MSCI benchmark – but with 20% less carbon intensity.