Retail investors valuing liquidity over returns
Being able to provide certainty about redemptions is worth fund managers pursuing when targeting the retail market even if it means sacrificing returns, according to Federation Asset Management.
Speaking at Momentum Media’s Australian Wealth Management Summit in Sydney, Cameron Farrar, head of distribution at Federation Asset Management, discussed its offering for wholesale and retail clients.
Given the approaching intergenerational wealth transfer, many fund managers are looking beyond a traditional institutional base to target a retail audience and broaden their asset flows.
When looking to launch its products, Farrar said Federation opted to make sure its Alternative Fund II structure could be accessed by both types of clients.
“We have $3.5 billion in assets and most of that is with institutions, but we also have a wealth management product. We find advice firms typically have most of their clients as wholesale but might have a remainder who are retail, and they want to have access to the same ideas for both or it can be painful and create a two-tier system.
“So we went through the hoops to get licensed for retail investors as well so that an adviser who has a mixed book can use the strategy for both types of clients.”
This product is an open-ended evergreen structure which offers quarterly redemptions from a portion of cash set aside, and Farrar said this option had been put in place following investor demand.
“We made significant enhancements to the structure due to investor demand. If you are targeting the fund to wholesale clients, then you have to acknowledge that they go through life events, such as divorce or death, and they will need the money.”
While Farrar said optionality has caused a cash drag, he said investors were understanding of that in order to preserve the liquidity.
“This functionality presents some cash drag, but people are happy with that to exist if it means they can redeem their money.
“The liquidity function is rarely used, but they are still willing to give up 120–150 bps per annum to have that option available.”
Looking ahead at how the alternatives market could target retail clients, Farrar said he expects to see growth from those products focused on equities and property or a combination of both.
Asked which funds would work well with the mass market, he said: “I don’t think it would be private credit because there are so many out there and it would be difficult for retail investors to ascertain.
“Most Australians know about equity from CBA listing or Telstra, that is intuitive to us, and they know about property so combining equity exposure with real assets such as real estate or infrastructure to form something that can generate yield would be an obvious first step.”
AUTHOR
Laura Dew
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