In Focus: Henderson Alternative Strategies Trust

Ian Barrass, manager of Henderson Alternative Strategies, on turning around an ailing trust, the risks associated with alternative assets and investing in illiquid holdings

Emma Wall 28 July, 2017 | 4:15PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Ian Barrass, Manager of the Henderson Alternative Strategies Trust (HAST).

Hello, Ian.

Ian Barrass: Hello there.

Wall: So, I thought we could have a look at the Trust in depth, a little different to what we do on this series usually when we go macro and that's because it has a very interesting story. Looking at the one and two-year figures, performance is strong; but having a look at the five-year figures, I think it starts to look quite negative. Why is there that disparity?

Barrass: Well, we took this Trust over four years ago and that was a result really of some underperformance that occurred with the Trust, especially during the course of 2012 and it resulted in the Board deciding to put the Investment Management Agreement for the Trust out to tender and we were one of 33 firms that pitched to actually get the mandate and we were delighted to win the mandate.

But then it did involve restructuring the portfolio that we inherited which really quite frankly given that it was relatively illiquid, took time to do. But we managed to restructure 80% to 85% of it after a couple of years. So, it did take a few years to actually get the portfolio in the state that we wanted it, to upgrade its portfolio quality and really get it looking like we really wanted to look like. So, the last couple of years it's been very much a Henderson portfolio as it were.

Wall: And you touched on the strategy there by mentioning the illiquidity of the assets and that's because this is an alternative strategy. Alternative is rather a catchall term. It means all things to all people. What does it mean to you?

Barrass: Well, this is a very broad-based portfolio that we run and one of its beauties is that we have created a portfolio – the individual investments, we think, our shareholders are unlikely to hold, very many of them, themselves. So, it's generally differentiated, genuine diversifier, seeking to deliver global equity returns. But the specific things we do invest in on a global basis, we've really put into five investment categories.

There's private equity, there are hedge funds and there's property; all three well-known alternative asset classes. And then we have two other categories, one called specialist sector, which really means we can invest in any particular fund that focuses on a sector, often in an alternative or a specialist basis. So, it might be renewable energy or it might be a credit fund, for example.

And the fifth category is what we call specialist geography and those are funds that are run by managers who focus on particular geographies, either in terms of fixed income or equity investment and that really is where we get a lot of our emerging markets exposure from.

Wall: Alternatives have had quite a lot of press in recent years partly because of this surge for income, equities and bonds not delivering what they need to for investors' portfolios or indeed cash and also, the fact that equities and bonds have become increasingly correlated because of quantitative easing. However, alternatives are not suitable for everyone. So, what role does this Trust play in a portfolio because presumably there is greater risk associated with some of these asset classes…

Barrass: You're right, Emma. There's no denying there. And we have a World Equity Benchmark. So, clearly, there's an equity target return what we have over a period of time that we're trying to better. And there's a reasonable degree of risk in the portfolio. There has to be, because of that return dynamic.

So, at one end of the spectrum, we can be looking at return requirements for individual investments over holding periods of anything up to three or five years of perhaps 18% to 20% per annum with perhaps some of our private equity investments would fit that category. At the other end of the spectrum, we will go down to looking at returns for individual investments of perhaps 8% per annum over a holding period. And some of our hedge fund investments would fit into that category, for example.

So, we've got a very broad range of returns to choose from, but we must blend it down over the course of a period of time of three, five years or more into a net return that is going to be better than global equity returns. So, we have a target, an NAV total return target annualised of 8% per annum is we're trying to achieve here. Because if we do that then we should over a period of time depending on which period of time you measure global equity returns over, we should perform better than global equities.

And this is all about providing an alternative to investors who want global equity-like returns but want to diversify in a differentiated way to actually achieve, a different way, to achieve those returns and that's what we're after here.

Wall: Ian, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar