Would You Invest in a Risk Parity Bond Fund?

(July 4, 2013) — Alternative asset manager Aquila Capital has launched what it claims is the world’s first risk parity bond fund in an effort to target investors who want more from their fixed income portfolios.

Taking the basic principles of risk parity, the bond fund is comprised of four risk-weighted tranches of fixed income assets, which are designed to be uncorrelated with each other.

Comprised of inflation-linked bonds, government bonds, corporate bonds and carry positions in emerging markets, the AC Risk Parity Bond Fund is a long-only strategy with no leverage.

As such, it targets cash plus 3% and an annualised volatility of 3%.

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There are no overlays, nor dynamic tweaking capabilities. Other than some currency hedging, Aquila Capital’s design is purely passive.

Aquila Capital’s managing director Stuart MacDonald told aiCIO the decision to not include leverage was taken after speaking to investors: the feedback was clear, they didn’t want leverage and they thought it was very difficult to call where the market was going.

Research carried out by Aquila Capital ahead of the fund’s launch showed 71% of the 165 European pension fund professionals asked believed it was “difficult” for fixed income investors to forecast the timing and direction of future interest rate movements over a three year period.

Aquila Capital’s survey also found 80% of pension fund professionals believed rising interest rates was an “important” or a “very important” challenge for their fixed income portfolios.

Aquila Capital’s backtesting of the risk parity bond fund showed even in 2006, when the Euribor rose every month for a whole year, the bond would have produced a return of 1.9%, net of fees.

Portfolio manager Torsten von Bartenwerffer said the product was created to serve investors with long-term, stable returns.

“We believe this will strongly appeal to a broad range of long-term conservative investors,” he said.

“The strategy focuses on managing uncertainty through effective diversification between assets that have no correlation to each other, and which have various correlations to different phases of the economic and fixed income cycles.”

Currently the capital allocation sees 23.1% of the fund in inflation-linked bonds, 23.4% in government bonds, 23.3% in carry positions in emerging markets, and the heaviest weighting given to corporate bonds at 30%.

The fund, which has been set up as a UCITS (SICAV) fund, requires a minimum buy-in of €50,000, and charges a management fee for the institutional class of 0.45%.

Would a pure passive risk parity bond fund help you sleep easier at night? Let us know.

(July 3, 2013) -- Unlisted infrastructure funds raised 77% more capital during the first half of 2013 than the same period last year, according to Preqin data.

That is a $5.9 billion dollar increase year-on-year, from $8.2 billion to $14.5 billion.

In May 2013, Macquarie European Infrastructure Fund IV was the largest vehicle to reach a final close, raising $3.56 billion in investor capital.

A total of 10 infrastructure funds also reached an interim close during the second quarter of 2013, raising an aggregate $2.4 billion. There are now 144 unlisted infrastructure funds in the market, together targeting $93 billion in investor capital.

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Major asset managers are on board, too.

JP Morgan Asset Management has added seven new infrastructure specialists to its global real assets team in the last seven months alone, culminating July 3 with a new CIO. Matt LeBlanc, formerly a private equity energy specialist ArcLight Capital Partners, will be responsible for the firm's OECD infrastructure equity platform, worth roughly $8 billion.

In a recent paper, the asset management firm predicted portfolio allocations to real assets—particularly infrastructure—could rise from the 5% to 10% average today to 25% in the next decade, as institutional investors search for growth in less-explored assets. In light of the research, the firm said it plans to make "significant" investments of its own in infrastructure.

Japan's Pension Fund Association recently joined the growing infrastructure investment trend when it took a stake in a US gas-fired power plant—Michigan's Midland Cogeneration Venture. The pension fund also plans to spend $1.25 billion on 10 overseas infrastructure projects such as pipelines and harbors, CIO Daisuke Hamaguchi, said this week, the Wall Street Journal reported.

More institutional investors will be following Hamaguchi's model, according to Elliot Bradbrook, Preqin's infrastructure data manager.

"There is still substantial investor appetite for the asset class, and this will likely drive further fundraising success in 2013 for fund managers that can demonstrate a consistent track record and investment strategy," Bradbrook said.