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Portfolio changes and how the Four Pillars approach was applied

TOPICS DISCUSSED

Portfolio changes
How the Four Pillars approach was applied
How the approach was implemented in two phases

The AAN AM IC considers that the ability to combine active, passive, and smart beta strategies is important with regard to the Core, Growth, Australian and Sustainable Growth Models. Each of these styles provides pricing and strategic advantages through the economic cycle, ensuring the AANAM models do not skew to one investment style, e.g., value or growth.

While we tested our original three pillar approach after extensive analytics, we identified in periods of extreme stress a four-pillar approach would add additional diversification and also not have a significant reduction in return. The size of the group now growing to around $1 billion in FUM we felt it appropriate at this time to add this additional layer of protection into the portfolios.

The four pillars approach will allow us a specific framework to analyse each portion of the portfolio. This will be the lens to track and monitor each asset sector and each investment based on their position in the four pillars approach.

After extended discussions with various alternatives, the IC made the decision that AANAM did not want to return to a ‘deep value’ solution – having had that experience with the Perpetual Direct Equity Alpha fund – and would prefer a concentrated value style with more flexibility to adapt within value/growth rotations.

Given the more generic solutions available it was agreed to tender for a bespoke solution and the successful business was Perpetual Equities. The deciding factor was Vince Pezzullo himself (Head of Perpetual Australian Equities) committing to managing the portfolio.

Throughout the course of 2022 the AANAM IC worked on documenting the four pillars approach to managing Australian and International Equities. This approach was implemented in the portfolios in two phases.

  • Phase one provided the inclusion of Lazard Global Equity Franchise Fund (International shares – Neutral\Value) in 2022 and the Perpetual Australian Focus Fund (Australian shares – Value\Neutral) in February 2023.
  • Phase two saw the IC and AAN AM Board conduct an Australian equities review in February 2023, which ultimately saw Bennelong replaced as a manager with DNR Capital (Australian shares – Growth\Neutral) in May 2023.

The empirical data showed the AANAM historical three pillars approach had been successful and was still relevant but by adding the fourth Pillar, AANAM could further reduce the style bias that any individual manager may have on the portfolio.

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