AllianceBernstein in Focus

Investment Option: Centuria LifeGoals AB Managed Volatility Equities Fund

 

Centuria Life asked AllianceBernstein, fund manager of the Centuria LifeGoals AB Managed Volatility Equities Fund, a series of questions.

1. Briefly describe AllianceBernstein as a Fund Manager.

AllianceBernstein (AB) is a leading global investment management and research firm. We bring together a wide range of insights, expertise and innovations to advance the interests of our clients around the world. It takes a broad and deep skill set to fully understand financial markets. And that expertise doesn’t stand still: markets are in constant motion, and we move with them, guided by more than 50 years of experience.

We are committed to in-house research with a team of over 200 dedicated to fundamental and quantitative analysis. Our global analysts with diverse specialisations collaborate and connect in order to share perspectives across sectors, regions and asset classes. Collectively, they generate differentiated insights to help inform better investment decisions.

We have a comprehensive range of research, portfolio-management, wealth-management and client-service offices around the world, reflecting our global capabilities. 

2. Briefly describe the strategy of the fund? What exactly is a managed volatility strategy and why should investors be concerned with this?

The fund seeks lower volatility, reduced downside risk in falling equity markets, and the potential for long-term capital growth and some income (including franked Australian dividend income). It invests mainly in ASX listed shares, with up to 20% of its assets in global developed-market shares, and has the ability to hold up to 20% in cash.

The managed volatility strategy therefore aims to deliver a smoother performance pattern and downside risk capture by combining the complementary and compensating characteristics of price stability, high quality cash flows and reasonable valuations.

Our research indicates that by seeking higher quality names within the low volatility universe of stocks, we can drive better returns over time. Quality is reflected in high and stable profitability and careful, shareholder-friendly management of capital.  By incorporating a perspective on valuation, we can avoid pockets of the market that may be crowded, and thus expensive.

We also use our fundamental insight to reduce risk in the portfolio and the inclusion of up to 20% of portfolio in global stocks improves downside capture.

The fund aims to capture 50% of downside and 80% of the upside each month (on average) with returns 25% less volatile than the market. This means, when the market falls, the percentage fall of the fund, will be less than the market.

During times of heightened market volatility, e.g. the Global Financial Crisis (GFC) and Covid-19 pandemic just to name two (there has been many occurrences of heightened market volatility over the last 30 years), to be forced to sell when markets are down is the worst outcome for any investor. While markets usually recover, an investor’s ability to absorb this volatility depends on their investment timeframe.

Where an investor is near or at retirement and may need to sell assets to realise income during times of heightened volatility, reduced downside risk can be an important way for this investor to minimise losses during these times. This risk is also known as ‘sequencing risk’ and low volatility strategies can help to reduce it.

Low volatility strategies are not just for retirees and can be for investors looking for lower volatility and outperformance. Where investment losses are less in down markets, this can have a material positive impact on returns over the long-term. Reduced downside risk (or fewer losses in falling markets) leaves more of your investment to grow when markets rise again, contributing to faster recovery of your portfolio and the potential to generate bigger outperformance through the power of compounding.

3. What are examples of the largest holdings that fit in the strategy?

Top 5 Holdings	Weight	Comment
Coles Group	4.6%	Improving operational capability and supermarkets gaining share of food
Transurban	4.2%	Attractively valued ‘world class’ assets with balance sheet resilience to Covid-19
Medibank Private	4.2%	Stable financial stock as ‘effectively’ regulated, ongoing turnaround
Sonic Healthcare	4.1%	Market leading position to recover post-lockdowns and provides Covid-19 tests
Woolworths	3.6%	Positive price outlook, industry leading assets, supermarkets gaining share of food

As at August 31, 2020. Source: AB

4. To date, how has the fund navigated and performed during the Covid-19 pandemic and what are some key takeaways from the experience going forward?

We are a defensively positioned portfolio focussed on quality, stability and price. Pleasingly in February and March the portfolio performed as it was designed to, outperforming the collapsing market very strongly. Since then we have given some of the alpha back during the risk-on rally, as we would expect, for a strong net positive alpha year to date.

In terms of our stock holdings, they had pretty solid results e.g. Coles, Medibank and gold stocks have done well in this environment. One stock which had a slighter weaker result was Telstra, its fixed line business disappointed in August, but we continue to have confidence in their cashflow and dividends (given the reductions in capex) and where we see their mobile segment going.

We have avoided tech stocks such as Afterpay and Xero as they do not generate material cashflow and we perceive them to be subject to substantial risk. We have also avoided resource plays such as Fortescue as they are excessively volatile in their returns.

In terms of where the market is heading it is really hard to call, as there is a lot of uncertainty in markets. There is a compelling bull and bear case, but in our view the risks are still skewed to the downside and we are still seeing jitters in markets.

Markets will potentially get stronger when there is good news around vaccines supported by ongoing money printing and fiscal stimulus. In reality, we have a choppy earnings environment with PE’s ratios at their highest since the start of the century, but they could even go higher.

The bear case is that a lot of optimism is priced in already – even two years out the multiples and markets are high versus history being about 20% higher. We see three big risks: –

1. Covid-19: we are seeing another wave in Europe and even if there is good vaccine news, which we are likely to have in coming months, a vaccine is unlikely to have a dramatic impact for a period of time through to middle or late next year.
2. Even if Covid-19 were to disappear overnight, the economic damage has been substantial in Australia and around the world and as fiscal stimulus slows this creates problems.
3. We are entering into a period of great geopolitical risk, whether it is trade tension with China or the US. The risk of a delayed US election result is high, and this will increase volatility in the markets.

In an uncertain and volatile world, we are looking to continue to focus on quality, stability and price. We don’t believe in a broad-based V shape recovery. We think the economic recovery is anaemic, where there could be continued pockets of strengths, such as some parts of retail spend. In this context, the portfolio remains defensively positioned.

We are quite sure that deficits will be large across the globe, and that money printing will be substantial.  We see gold as offering lower downside risk to aid in this outcome.

In a world where higher and higher multiples are paid for high profile tech stocks, companies that attract less media attention with strong and resilient cash flows are attractively priced in a risky environment. As a result, the main areas the fund is positioned in includes infrastructure, supermarkets, and healthcare. We remain more cautious on other areas of the economy that rely on economic bounce back such as banks, resources and tourism related stocks.

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Disclaimer

This article has been issued by Centuria Life Limited ABN 79 087 649 054, AFSL 230 867 (Centuria), the issuer of Centuria LifeGoals Investment Bonds, and contains general information about Centuria and its related bodies corporate that is current as at 7 October 2020.

The responses to questions noted in this article have been prepared by AllianceBernstein Australia Limited (“ABAL”)—ABN 53 095 022 718, AFSL 230 698. ABAL is the investment manager of the Centuria LifeGoals AB Managed Volatility Equity Fund.

This article is provided solely for informational purposes and is not an offer to buy or sell the Investment Option, being, the Centuria LifeGoals AB Managed Volatility Equity Fund or to provide any service. This article is not a recommendation or personal advice in relation to Centuria or ABAL, or any product or service offered by Centuria or ABAL, and does not take into account the investment objectives, financial situation or needs of any particular person. Prospective investors should obtain and read a copy of the Centuria LifeGoals PDS relating to any investment option before making a decision to invest. Centuria and its associates will receive fees in relation to an investment in its Investment Bonds as disclosed in the PDS. Investment in each of Centuria’s investment bonds is subject to risk including possible delays in payment or loss of income and principal invested. Past Performance is not a reliable indicator of future performance.

The document has been prepared from information believed to be accurate, however, no representation or warranty is made as to the accuracy or adequacy of any information contained in the document.