At Anchor Pacific, we employ a risk-based functional framework for capital allocation within the entire portfolio. Beginning in Q4 2019, we officially introduced our Model Portfolios which are designed to mirror the different respective components of each client portfolio and deconstruct the drivers of return for various functional risk category groups.
The three main Model Portfolios that comprise the long-term core multi-asset portfolio are:
AP-CIO Capital Growth Portfolio (the “Capital Growth Portfolio”)
AP-CIO Stable Portfolio (the “Stable Portfolio”)
AP-CIO Capital Preservation Portfolio (the “Capital Preservation Portfolio”)
Each of the Portfolio Groups is generically exposed to these risk factors to the following degree:
Weights to each Model Portfolio are specific to each particular client’s unique risk tolerance, time horizon, and liquidity needs, as well as the firm’s view of risk and return expectations for specific asset classes and strategies over the near, medium and long-term.
Last quarter’s Portfolio Spotlight highlighted the strong performance of the AP-CIO Absolute Return Portfolio, which is one of three sub-sets of the AP-CIO Stable Portfolio, which consists of a spectrum of growth, income, and risk-managed strategies and assets that exhibit expected returns close to that of global public equities but experience lower levels of volatility.
The AP-CIO Absolute Return Portfolio is exclusively actively managed and employs strategies with the flexibility, expertise and structure to invest in dynamic strategies utilizing asset classes other than equities, in some form of hedged or other manner designed to reduce or manage risk.
The Absolute Return Portfolio, which is intended to anchor the overall Stable Portfolio, performed strongly again in the third quarter with the combination of risk-managed, low volatility, actively-traded, and arbitrage strategies creating a very strong equity market defensive position that is intended to prove resilient over time and act as a true portfolio ballast in stormy waters.
*Standard deviation of monthly returns and beta with respect to the S&P 500 Index (in USD) based on a three year backtest from October 1, 2017 to September 30, 2020.
As of September 30, 2020, the Absolute Return Portfolio consisted of five unique holdings across seven differentiated sub-strategies. At the end of the third quarter, we adjusted our exposures by modestly reducing exposure to Credit Relative Value strategies.
In this quarter’s Portfolio Spotlight, we highlight one of our specific holdings in the Absolute Return Portfolio, which is an allocation to a specialist manager employing an arbitrage trading strategy in the Special Purpose Acquisition Companies (SPAC) sector, which sits in the Equity Arbitrage strategy within the AP-CIO Absolute Return Portfolio.
A SPAC is a type of investment vehicle formed for the sole purpose of acquiring an existing company as and when deemed appropriate by management – it is often referred to as a “blank check” company and management usually has a defined period of time, typically 12-24 months to identify and seek approval of for an acquisition. More information on SPACs is available here.
The arbitrage that exists within investing in SPACs is due to the structural nature of the market. The proceeds from the issuance are invested exclusively in Treasury Bills and held in trust until the acquisition takes place. Owning a SPAC at issuance is relatively low risk because the secondary market traded price is anchored to a degree to the net asset value as you have the option to put or give the shares back either when the deal is approved or at the maturity date if a deal is not consummated. The arbitrage strategy results from the applying of leverage in owning the SPAC, typically 2-4x, which is expected to generate a stable low risk-return of around 3-5% per annum with some additional upside from the warrants which are usually attached to the SPAC issuance and resulting in a targeted overall return in the range of 6-10%.
Prior to COVID, the SPAC arbitrage sector was relatively sleepy and characterized by low volatility, stable returns, and minimal downside. Post-COVID, SPAC arbitrage has generated significant and outsized positive returns in the months of April, June, and September. April’s return was simply a reversal of March’s losses of around 5%, which were the result of liquidity and some forced selling by overleveraged investors whereas the June and September returns of about 14% and 8% respectively were a result of our manager opportunistically capitalizing on the exuberances of new investors entering the sector and willing to overpay for high profile names and speculative growth in technology-enabled private companies.
Our SPAC manager generated a quarterly return of just under 11% and is up just under 30% YTD. With a typical client allocation in the range of 3-5%, the exposure has been a meaningful return contributor and risk diversifier. We remain extremely pleased with the performance of the strategy and equally excited about its prospects for the near future – capped downside with the ability to participate on the upside while tempering for future expectations of returns normalizing to their historical averages.
Client allocations to the Absolute Return Portfolio and SPAC arbitrage strategy remain significant (15% of total) – we maintained an overweight exposure during the third quarter as the majority of the strategies comprising this sector remain both attractively priced and defensive in nature should equities, presently priced to near perfection, experience another downturn which we view as a more than a reasonable possibility.
Download the complete Third Quarter 2020 Portfolio Spotlight:
The firm’s model portfolios were established on October 1, 2019. The model portfolios are hypothetical investment portfolios used to showcase how we believe asset allocation may be used within the context of a client portfolio. The models also provide a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. However, implementation assumptions (which may include but are not limited to the timing and diligence with which the portfolio is rebalanced, the execution price for securities transactions, and any trading and account-related costs, fees, or commissions) have been made when calculating the model returns that may be difficult or impossible for any investor to exactly replicate the model portfolios. For this reason, there is no expectation that the model returns will replicate the actual performance of any client following the same guided portfolio strategy. Performance figures are net of fund level expenses and fees but do not include any allowance for Anchor Pacific’s Investment Management Fees. Past performance is not indicative of future performance.
Anchor Pacific Investment Management Corp. (“Anchor Pacific”) is a Vancouver, BC-based portfolio management firm, which leverages process, technology, and infrastructure to democratize the process of managing endowment and pension style investment portfolios to deliver innovative, high-touch, and transparent investment programs across the full spectrum of asset owners and investment consumers.