What are the best qualities to look for in external partners and how should we prepare for future investment challenges?

These were among the key themes discussed at last week's 10th Southeast Asia Institutional Investment Forum held in Singapore.

For Bruce Tomlinson, manager for hedge funds and alternative strategies at Australian superannuation fund Sunsuper, a reliable partner involves more than just accounting or financial know-how, especially when there are tangible or illiquid assets involved.  

“One thing I would add with alternatives in private markets is you would absolutely want to have good partners, people who would have operational capability, people who cannot just handle a balance sheet but have to operationally take control of the assets,” he said.
 
“Particularly with asset-backed alternatives," continued the Brisbane-based fund manager, "you do need people who have operational capabilities, not someone who just knows how to structure a credit but understands how to operate an asset, whether it’s a toll road, airport, or real estate asset.” 

Experienced partners who have proved their capabilities through the tough times are the ones that Sunsuper especially values.

“They show us the case studies [where] they’ve had losses and defaults and how they’ve dealt with them,” Tomlinson added. "You want to have partners who’ve gone through that cycle and know how to deal with it."

Tomlinson told AsianInvestor in October that Sunsuper was investing in more specialised parts of the market, such as private credit, stressed and distressed debt, and structured and asset-backed credit, as it seeks higher returns from alternative assets.

Speaking on the same panel, Benjamin Rudd, chief investment officer of Prudential Hong Kong, said the insurer judged all fund managers, in whichever asset class, but their own rising standards.

“We spent a huge amount of time improving our governance, our process[es], our operations," he told the audience. "When we work with other fund partners, we expect them to do the same.” 

“Back in the old days, we got a lot of people who [did just] operational due diligence, which is a little bit of a box-ticking exercise. Operational due diligence has a 'yes' or 'no'; it’s black or white,” he said.

MITIGATING RISKS

During the panel discussion, the investment experts present also exchanged opinions about how best to tackle the investment challenges ahead.

Rudd and Aaron Low, chief executive of investment platform firm Lumiq, and Chong Chee Loong, wealth leader for Singapore at Mercer, agreed that investors should not rely purely on historical models.

That's because past performance, while a credible guide, is no guarantee of future performance, not least under current circumstances. 

Every stress test is predicated on what happened before, Low noted, but this is the first time global markets are going through both quantitative easing and, now, quantitative tightening. 

“If really past history is the way to gain in financial markets, then basically the richest people in the world today would be the librarians,” Chong said.

So how best to prepare for the coming challenges?

One key thing is to make sure all your operations are fully integrated, Rudd said, because during the global financial crisis the platforms in a lot of investment managers were not capable of handling the complexities that they built into their portfolios. 

“Investment can’t just be seen as the buying and selling of things," he said. "Investment is making sure that your middle office and your back office are fully up-to-speed, fully optimised, fully interlinked, work in seamless conjunction across the entire process.”

Sunsuper's Tomlinson also said having good partnerships with managers and flexibility in structuring a portfolio are important order to take advantage of investment opportunities as they come.

It’s too late when the opportunities are already there to think about them, and then set up and try to implement something because it’ll take two, three four months.

"So you want to be prepared in advance,” he said.