Investors tend to extrapolate historical returns into the future, and this is something that will not work in the current climate, Reto Ineichen, CEO of Alpinum Investment Management, says in an interview.
Reto Ineichen, you are the CEO of Alpinum Investment Management, and previously worked as a portfolio analyst for Marcuard Heritage. What is the relationship between these two companies?
Alpinum IM serves as the asset management arm and investment competence center within the Marcuard Heritage Group. Alpinum Investment Management was born out of a spin-off from the Marcuard Heritage Group.
At this time, strategic importance led the company to position itself for various future challenges, such as operational efficiency, regulatory requirements and most importantly offering our clients efficient and value-creating investment solutions.
Alpinum celebrated its 5th anniversary in 2019. How has it grown since the firm was established?
In the beginning, we fulfilled our mission we got from the group to build up customized Luxembourg SICAV-SIF portfolios, which serve as the building blocks for the highly risk controlled Marcuard Heritage model portfolios.
«In Singapore, the funds are recognized under the restricted scheme»
In the meantime, these funds got a couple of awards – for instance, a five star Morningstar rating and other well-known European Hedge Funds awards. Step-by-step, we picked up customer and market needs by establishing new portfolios and started to offer also share classes for investors outside the Marcuard Heritage group, who already invested more than $100 million with us. In a nutshell, it’s the history that pushed us to a 1.6 billion asset manager, specialized in credit- and alternative investment solutions.
Are the funds available in Singapore?
In Singapore, the funds are recognized under the restricted scheme, which means they can be actively market to accredited investors, but we haven’t done a sales push in Asia so far or looked for a distribution partner.
What have been your main challenges in the current market, given current global risks and volatility?
Our approach is very much risk-controlled. This is also illustrated by our track record, which has delivered relatively consistent returns with fewer performance swings. For us, a more volatile environment does not automatically mean that this will cause a huge challenge for us.
«But many investors have not adjusted to this reality»
We employ a scenario-based investment framework, which helps us to adapt our portfolios quickly if needed. We always «stress-test» our portfolios with a «realistic» bear case, which helps us to weather also more rough periods. The bigger challenge, in general, is the mindset of investors.
Could you elaborate on that?
Investors tend to extrapolate historical returns into the future, and this is something that will not work in the current climate. Some investors realized that painfully in 2018, and they got reminded that maybe a more sensible approach towards risk is warranted.
«We implement a very flexible and opportunistic investment style»
But many investors have not adjusted to this reality. Teaching people that they should be expecting lower returns is tough because they rather tend to lift their risk budget to achieve similar returns as in the past. However, this increases the risk that such investors will be disappointed at a later stage when market valuations have normalized i.e. after stomaching a painful correction.
What is Alpinum’s approach towards risk?
As mentioned before many investors have simply adjusted their risk budget to target similar returns as in the past. We haven’t done that. Our risk budget has always been the same.
Instead, we implement a very flexible and opportunistic investment style. Most importantly, we are in the permanent search for attractive risk premia that enables us to still deliver a similar return, while keeping the risk budget stable. Hence, we are creative and go also beyond the obvious. That’s a differentiator we have versus our peers in the market.
«We always seek, on a relative basis, attractive spreads or risk premia»
We have a very strong risk discipline. We adjust our positioning pro-actively and allocate continuously where we identify attractive risk premia. However, if the market goes against us, we keep our risk discipline high and act «re-actively». In a nutshell, we start to reduce risk when we lose money (and vice versa). That’s pre-defined, clear, and time-tested. You cannot predict how the market will change, but we can predict our own risk management behavior.
What do you mean by being opportunistic?
We always seek, on a relative basis, attractive spreads or risk premia. Whenever we are able to identify attractive risk premia in a given asset class, we try to gain exposure to it. If that exposure is exposed to high risk or volatility, we simply buy less to keep the risk budget within our pre-defined limits.
«Within Asia, we hold an overweight position in Vietnam»
That’s very important to understand: we are in constant search for attractive risk premia. We rather hold higher levels of cash than owning something that we believe is not compensating for the embedded risk.
What opportunities do you see in Asia?
Fixed income. When we, for example, talk about investment-grade bonds, you now get a much higher spread paid in Asia as compared to Europe or the U.S. This means at the moment we gain exposure to the risk premia in investment-grade bonds in Asia and hold minimal or no exposure in Europe and the U.S.
In terms of equities, we believe there is a catch-up potential for Asian equities in general vs. developed markets in the U.S and Europe. Within Asia, we hold an overweight position in Vietnam, which is a direct beneficiary of the trade conflict between the U.S. and China.
And what do you see on the liquidity side?
For some larger clients, we’ve quit highly liquid and low yielding markets where spreads are very tight and the return is not in-line with the embedded risks. But you need clients that can afford less liquid investments and they need to understand that the capital is not liquefiable on a daily basis. However, the incremental additional return is significant and hence, investors get well rewarded.
«You definitely cannot have the same return expectations as in the past»
Over the last eight years, we have specialized in private debt and have built up a meaningful universe of private debt investments. Today, we provide our clients via our platform access to more than 20 direct loan specialists across geographies, specialization and risk categories.
Most of these investments are senior secured and pursue a conservative investment strategy, while still generating a high single-digit return, typically in the range of 6 to 8 percent p.a. in dollars.
«We think this is an approach that will become more popular going forward»
Historical returns in equities ranged somewhere between 7 and 8 percent p.a. in the past. Nowadays, because valuations are higher and global growth is lower, you should expect that this would be less going forward. If you own selective senior private debt exposure, which earns you 5 to 8 percent, you will achieve a similar return as compared to equities, but with much lower volatility. What’s important is to be selective in what you own, and to avoid concentration risk.
So, risk-focused investments rather than focus on returns?
Yes, you need to understand your own risk budget and try to get the best return out of it. The other way around will not end well. Everybody wants high returns, as do us, that’s a given. But you cannot have the same return expectations as in the past.
Many investors realized that in 2018, and got reminded that a more sensible approach towards risk is more sustainable and lets you sleep more quietly at night.
Investors want both capital preservation and capital appreciation. However, an investor needs to be realistic that an expected return of 5 percent p.a. in today’s environment is already great, especially as you cannot expect to get much more out of equities when the economic growth environment is muted. Therefore, we think this is an approach that will become more popular going forward.
Reto Ineichen is the CEO of Alpinum Investment Management and heads the research and portfolio management. Prior to joining the firm, he was a portfolio manager and fund analyst between 2011 and 2014 for Marcuard Heritage, an independent wealth manager. Prior to joining Marcuard Heritage he was a portfolio manager and hedge fund analyst for GL Funds (2005 to 2011). Before joining GL Funds, he worked for UBS and affiliated companies (1999-2005). He is a Certified European Financial Analyst (CEFA) and holds a degree in Economics and Business Administration of the University of Applied Sciences of St. Gallen, Switzerland.
