A boutique fund manager has warned SMSF investors to reassess their allocation to equities in anticipation of a market correction many analysts are predicting will happen in the short term.
According to Lucerne investment Partners chief executive Anthony Murphy, the low interest rates pervading markets have led SMSF members to chase risk and better returns currently on offer from equities to support obligations like minimum yearly pension payments of 4 per cent no longer covered by the poor returns generated from cash or cash-equivalent assets.
“[But] as Michael Burry said recently, the longer a bubble goes on, the harder the fall, and Warren Buffett is starting to say the same thing and that is to prepare for a market crash,” Murphy told smstrusteenews.
“So investors now really need to start thinking about how they will make money over the next few years.”
To this end, he suggested SMSF investors consider allocations to less traditional assets via vehicles like the Lucerne Alternative Investments Fund (LAIF), which is a fund-of-funds offering with a focus on delivering equity-like returns while mitigating downside risk.
“The way we’re able to do this is to allocate to strategies that are more all-market strategies, or absolute return-based strategies, and there are two very important elements to that,” he noted.
“Firstly is having a sleeve of strategies that historically don’t hold a lot of correlation to the market, but more importantly it’s the correlation the strategies that they hold among themselves because you don’t want 13 to 15 funds being uncorrelated to the market, but all move together.
“We’ve found that if we have six to seven themes or funds working well at one time, generally LAIF is performing very well.”
Further, he emphasised Lucerne wants to provide retail investors access to wholesale or institutional funds that often house the best investment opportunities.
LAIF was established in December 2017, maintains a portfolio consisting of between 13 and 15 managed funds and has produced after-fee annual returns of 11 per cent. It currently manages $83 million in funds and the minimum investment required is $25,000. Allocations can be made either directly or through an adviser.
With regard to portfolio construction considerations, Murphy revealed some financial planning groups are employing a 15 per cent to 20 per cent allocation to LAIF.
“When you extrapolate that out, even at the higher range that 20 per cent is being invested in 13 to 15 managers and that means you’d be quiet low on weightings,” he said.''