Investment manager AMP Capital Investors is lifting the exposure of its diversified fund range to illiquid investments as the premium for these investments is returning.
AMP has been allocating funds to agriculture, the shipping sector and is about to invest into forestry assets coming out of troubled managed investment schemes (MIS).
"What we are trying to do in Future Directions at a diversified fund level is improve the diversity. Diversification is a mathematical formula; diversity is an art," AMP Capital international and Future Directions funds investment director Sean Henaghan said.
"When you look at diversification you look at a history of asset class returns and you do your modelling right? Based on the history of an asset class, you could say: 'well, we allocate 50-50 or 60-40'.
"But with these [illiquid] assets, you can't do it, because they are so new. So what we do is create risk proxies for these asset classes.
"We want different risk factors driving the performance of the portfolio. When we put these portfolios together we make sure we are not overexposed to a single risk factor."
He said one of the new illiquid asset classes was formed by shipping tankers.
"Shipping has a classic boom-bust cycle. What happens is that you get a lot of world trade growth, people are going out to start building boats and then they just build too many. Then the economy starts to slow and trade slows and certainly you've got a surplus of boats," he said.
"If you can time your entry and exit, you can actually make very good money in that cycle. You start buying when there is this glut of boats in the market and selling when there are not enough boats.
"The other is Australian farms. There has been a lot of cynicism about corporatising these farms.
"People have tried to do it in the past and it failed, so there was a fair bit of scepticism within the investment committee that had to be satisfied and we spent two years working with our directors and the team to develop a product that was properly aligned with our members."
Nine months ago, AMP Capital made its first investment of $35 million into this sector, and Henaghan said he expected to put in another $25 million shortly.
AMP Capital's investment committee has also just given its blessing to invest money in the troubled forestry MIS sector.
"The forestry investment was based on the fact of the implosion of the MIS. There are just a lot of assets being dumped onto the market," Henaghan said.
He said the role of the illiquid assets in the standard portfolios would remain relatively limited.
"Because they are illiquid and we are a daily priced unit fund, we are probably limited to about 15 per cent," he said.
But he said the exposure could be higher in bespoke mandates, depending on the client's investment horizon.
"If clients have the ability to take advantage of the illiquidity premium, we may put 30 per cent in their portfolios," he said.
"If they don't have to touch the money for 25 years, well, then let's take advantage of these illiquidity premiums, because it is very attractive at the moment."
