Thadeus McCrindle: Extra efforts to stay contrarian

By Elizabeth Fry

Sandhurst Trustees differs from other asset owners in that it is owned by a bank, has a high liquidity preference and manages its capital on a tactical basis.

Sandhurst investment chief Thadeus McCrindle has developed a different approach to portfolio management, relying heavily on what he calls active or tactical asset allocation.

Essentially, he is more willing than most to divert assets to short-term investments to generate a higher return or reduce risk.

"We are a little bit different because we focus a lot of our energy and resources on active asset allocation," he says.

McCrindle explains that owning and directly managing key risks is critical.

"It is no secret that market risks can and do change quickly, and by being tactical you are more actively managing those asset class risks, not waiting months to address them or hoping your external managers address them for you," he adds.

"When we see central banks or governments make decisions that have material impacts on the economy, it can rapidly change the risk settings. We are set up to respond and adjust exposures in days, not months."

McCrindle warns that a traditional investment strategy can, in essence, outsource many of the risks in the portfolio.

"I think we're amongst the most active in the industry. Many others in the super industry rely more on their strategic asset allocation and stock picking, but we complement that with active asset allocation."

Sandhurst also differs in that it has a higher liquidity preference than other super funds which McCrindle puts down to the links to banking.

All lenders focus on liquidity to underpin confidence and also be ready to mitigate the risk of massive withdrawals by depositors.

"That culture does influence our thinking from the top down," he says

Sandhurst has much lower illiquidity exposures than many of its peers.

The fund has more listed equity exposure and less unlisted property exposure or unlisted infrastructure exposure than other industry funds.

Consequently, performance over the last six months has been lower.

"The illiquid assets don't get revalued frequently, and equities have been down, so we have seen some relative underperformance.

Risk buckets

Another difference is that the Sandhurst investment chief's role is to accommodate the independent financial advisers whose views can come from the financial press.

That means keeping the conversation flowing on thematics like cryptocurrencies, whereby McCrindle largely dispels misconceptions.

Importantly, he notes, institutional thinking is out of place in the advice world.

McCrindle says financial advisers have specific styles when it comes to portfolio construction which funds need to be aware of for their product offering to appeal. They use heuristics that work well with their customer conversations.

For example, financial advisers categorise assets into 'buckets' - a hedge fund bucket or an alternatives bucket and decide what belongs in each bucket.

"This is at odds with the big super fund investment programs where the equity and bond bucket evolved to include everything from developed to frontier markets," he notes.

"Investment specialists can put an insurance or swap strategy into a traditional asset class, as they don't need it to strictly fit."

McCrindle frames strategies to account for this, but it means showing constraint. "Advisors do not want to see that a product with a balanced label is, a growth product.

"This affects which strategies you add to portfolios and which ones you don't," he adds.

The upshot is there are fewer hybrid strategies.

Heightened uncertainty

McCrindle's investment style is a challenge in a market characterised by the Ukraine war, rising inflation and heightened uncertainty about the geopolitical landscape.

He concedes that staying active and scouring markets for contrarian opportunities takes extra effort and focus.

Certainly, there is much for contrarian investors to get excited about - a painful sell-off in equity markets and more volatility ahead as long as central banks try to curb inflation without killing growth.

Contrarian investing has long been a chief motivation in McCrindle's career. He qualifies that by pointing out that Sandhurst is not like a hedge fund that bets the farm on an idea.

He won't make big bets until he sees the price go his way.

"We form a contrarian view and add an exposure, but it will not be very big, so we won't lose too much money if we're wrong. Then when we see the market price action starting to confirm our position, we scale up our position."

"That means our returns are a little lower than they could be for our ideas, but on the other side, we are not going to ever underperform badly with that approach."

With active allocation, he is walking a tightrope with the Your Future, Your Super performance test

Everyone has to have a framework to understand tracking errors and their risk budget, even if they are two or three per cent ahead of the benchmark.

"Everyone can take risks based on how much they can underperform, which is based on how much they outperformed in the past."

 The white hot asset class

As for private debt, this contrarian investor remains unconvinced that the hot new asset class embraced by the deep-pocketed asset owners is the bright spot in an otherwise bleak investment landscape.

McCrindle warns that the lack of transparency can be a risk.

"I worry asset owners don't understand all of the credit risks," he states.

"I have heard some being concerned about investment grade bonds backed by residential property whilst being comfortable allocating to private debt, I see the risk the other way around.

"Most private debt providers are lending some funds to companies that are equivalent to junk bond issuers. The high yielding bonds are unrated; there is no clear visibility."

Further, he thinks private debt investment will become a problem in a bad recession.

"If we have a moderate recession, it won't necessarily be a poorly performing asset, but if we don't have a recession - which is quite unlikely - it will be a brilliant asset."

In a good market, he goes on to say, private debt has a fat return premium and a comparable risk to other fixed income assets.

"In a bad recession - like the one in 2008, it's likely to be a mess. These aren't at all like government bonds."

Support Systems

There's plenty McCrindle likes about Sandhurst, including the support it receives from Sandhurst's owner, Bendigo and Adelaide Bank.

Bendigo's strong operational controls make life a lot easier.

"You don't have to grapple with what APRA means when it sets regulatory requirements. They have big teams that support that."

McCrindle notes that while investment chiefs in the big super funds don't have to deal with accountability issues, their counterparts in the smaller funds would have to get far more involved.

To conclude, McCrindle fervently believes there is more opportunity for active management to work well.

As inflation volatility has risen and looks likely to continue, there will be more divergence in performance between sectors and asset classes.