In this current economic and financial uncertainty, investors are advised to adopt a “barbell” investment strategy, which involves blending low and high-risk assets inside a portfolio to achieve a greater overall risk-adjusted return.
Springing out of the way that the Datt Group (the Datt family office) investments are managed, the Datt Capital Absolute Return Fund invests partially in commercial real estate (CRE) debt and partially in a long-only high-conviction Australian equities portfolio.
The heart of our process and philosophy is rooted in risk mitigation, and the multi-asset approach suits that perfectly. At one end of the barbell we have fixed-income and real assets, which is primarily CRE debt, which is core expertise for us, and at the other end is very high-conviction Australian equities. The two diversify each other – the property debt mitigates the equity risk.
We have identified investments into three risk categories: Real assets and income securities (lower risk), shares, value reversion, cyclical opportunities and special situations (medium risk), and within shares, growth and emerging companies (higher risk).
Our portfolio exposure is always spread among these three risk categories depending on the current opportunity set the market presents us with, and that approach has led to good outcomes over time.
As at 31 May 2020, the fund’s asset allocation was: CRE debt (41%); shares (52%); and cash at 7%. The equities part of the fund is very high-conviction: it currently contains just six stocks.
As at 31 May 2020, the Absolute Return Fund had achieved a 12-month rolling return of 14.7%, compared with a fall of 7% for the S&P/ASX 200 Total Return index over the same period, for outperformance of 21.7%.
A good example of the high-conviction approach on the equities side is our early investment in buy-now, pay-later payments platform Afterpay, which was a core holding (the largest holding) of the Absolute Return Fund at inception in December 2018.
We were in Afterpay quite early, because we felt that it ticked all the boxes for us, from the management team to the technology to the structure of the markets themselves. We believe that the growth path ahead for Afterpay is immense, particularly in the US, but that the local market isn’t valuing the opportunity the same way that it would be valued in the US.
We were happy to let Afterpay run to 25% of the overall portfolio, because we believe that compelling opportunities are rare, and when they come along they should be weighted appropriately.
We continue to retain a small holding in Afterpay, at about 2% of what the stake was its peak. We still like the company and the opportunity, but we like to scale into things, to reduce our risk, and to scale out of things – to take money off the table when we think an appropriate value has been reached.
The fund’s current largest two positions are in Adriatic Metals, which is developing a huge poly-metallic deposit in Bosnia; and SelfWealth, which bills itself as Australia’s cheapest online stockbroker. Both stand at about 15% of the portfolio.