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Fulcrum’s new fund offers cost-effective alternatives exposure to UK DC pension schemes

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Fulcrum Asset Management has listened to the UK institutional marketplace and launched a fund that it believes will meet a series of key considerations. 

Speaking with Hedgeweek at a coffee shop opposite Fulcrum’s office in Marble Arch, London, Matthew Roberts (pictured), Partner at Fulcrum, says that the Fulcrum Diversified Liquid Alternatives Fund (‘The Fund’) aims to give investors access to liquid alternatives in the “broadest possible sense”, in a single fund structure. 

Roberts joined Fulcrum to oversee the new business division from Willis Towers Watson at the end of 2017.

The strategy covers listed real assets, alternative credit and diversifiers (such as momentum strategies, and absolute return strategies including event driven and discretionary macro) and as Roberts explains: “It came about as a result of doing some market research, speaking to consultants, pension fund trustees. The feedback we got was that firstly, their clients don’t want too many line items and want relatively simple portfolios. Secondly, that they care about cost. And thirdly, particularly with respect to DC pensions, they care a lot about liquidity. We therefore made sure the Fund offers daily liquidity.”

Roberts explains that the first step of the investment process is strategic asset allocation. This is driven by all possible asset classes Fulcrum could invest in and then judging them based on a number of criteria; what does the opportunity set look like? How broad is it? How big is the market overall? What is the long-term risk-adjusted return for that particular strategy? How much does it cost, in general? 

“That led to us looking at a number of different weighting methods for different strategies and we ended up deciding, ‘simple is best’, so we have a pretty straightforward 40/40/20 mix of real assets, alternative credit and diversifiers,” confirms Roberts. 

In order to guard against lower liquidity in alternative investments when equities fall, the diversifiers bucket has been designed to be complementary to equities and bonds. Moreover, across the three buckets, Fulcrum’s team allocates dynamically between sub-strategies based on its own macroeconomic views. 

At present, there are between 15 and 20 sub-strategies within the portfolio, containing a mix of proprietary baskets, passive index derivatives and active external managers.

“The second step of the investment process is dynamic idea generation,” says Roberts. “We have these three broad categories but within each category our team is charged with coming up with different ideas. For example, in natural resources we have an agricultural technology basket on the basis that there is an increased global need for more protein, which is creating some good investment opportunities.”

One of the key principals when Fulcrum launched the Fund on 1st May 2018 was that it would be completely objective with respect to strategy implementation and to take the best possible approach for each sub-strategy. 

“If that means we should be passive we will use an ETF or index derivatives. If that means we should be active, we will go out to market to invest with a third party manager. Or, if we think the best solution is to develop something bespoke, perhaps because there aren’t many third party managers or we don’t think the quality is high enough, we will go the proprietary route. 

“In the case of AgTech, there weren’t many liquid funds around to consider so we asked our research team to develop a bespoke strategy of AgTech stocks; we wanted the strategy to be global, liquid and pure to the theme,” outlines Roberts.

At the end of the investment process, he says that roughly 50 per cent of the portfolio is externally managed, with the other 50 per cent of the portfolio combining passive and proprietary strategies. 

“We remain completely objective, at all times, about implementation. You could refer to this approach as ‘open architecture’,” adds Roberts.

The Fund has a target return of cash plus 4 per cent per annum over five-year rolling periods. No single sub-strategy is allowed to exceed 25 per cent of the overall portfolio. The benefit of using passive and thematic sub-strategies is that it minimises costs to the investor. 

“Our standard price is 125 basis points all in. There are no performance fees at any level. DC pensions have a charge cap so the more certainty we can give investors on what the fee is, the better,” says Roberts, who confirms that the Fund structure is a UK open-ended investment company (OEIC) which avails of the non-UCITS retail scheme (NURS). 

“This gives us a bit more flexibility to invest in early-stage managers. We will generally buy liquid UCITS funds but if we were a UCITS fund ourselves we would be constrained by how much AUM we could invest in smaller managers. A NURS fund helps to overcome that constraint,” says Roberts.

Within alternative credit, the Fund will consider holding high yield, secured loans, securitised credit, convertibles and emerging market debt. In general, Fulcrum is using active external managers in this area, although it has one internal strategy investing in emerging market debt.

Responsible investing is an integral part of the Fund’s investment approach and as Roberts explains: “In EM debt there are certain governance challenges, societal challenges and in some case environmental challenges. We particularly like local currency debt. It is reasonably high yielding, offers a good long-term growth story and the fundamentals have improved. We did some meta analysis, found as many different sustainability reports as we could on EM debt, ranked all the countries, and using those countries that came out on top, we constructed an equal-weighted basket. 

“There are seven countries in the basket at present and it will grow over time.”

This is a good example of how Fulcrum’s research team comes up with a proprietary solution to investing in sub-strategies, when the right opportunity arises. 

“We have a seven-strong dedicated team but in addition we use Fulcrum’s trading team and macro research team. We put any ideas through an evaluation process but not many get through – maybe three or four a year will end up in the portfolio. We want to control trading costs so we don’t want to be churning the portfolio too often. It’s a very gradual asset allocation program,” concludes Roberts.

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