Q&A: Damian Leach, Fulcrum Asset Management
U.S. institutional investors are taking a strong interest in alternative risk premia and risk mitigating strategies. Damian Leach, Head of Systematic at Fulcrum Asset Management, a US$6bn investment manager focusing on global, multi-asset investing across liquid markets, tells Greg Winterton more.
GW: Damian, tell us about Fulcrum. What is your approach?
DL: The firm was founded in 2004 by Gavyn Davies and Andrew Stevens, and the focus of the business is deploying our approximately US$6 billion on macro investing implemented either through discretionary or systematic strategies and, where feasible, across multi-asset investments. We look to bring strategies to life across asset classes, and that applies to both discretionary and systematic investing.
The key aspect of Fulcrum’s focus is to have discretionary and systematic strategies under one roof, managed within one collegiate research team. The collaborative focus brings benefits ultimately for both business lines: within discretionary, we make use of, and in fact built our systematic business, in part so that we can get that insight from our systematic strategies. Likewise, when we build and refine our systematic strategies, we lean on and make use of the fact that we are a macro-led researcher and have a level of real-world pragmatism that underpins everything that we’re building at Fulcrum on the systematic side: systematic strategies are ultimately about systematising human research.
GW: Alternative risk premia is currently a big buzz phrase among investors – how does Fulcrum approach the space?
DL: At Fulcrum, we’ve been managing risk premia and alternative beta strategies for a long while – we’ve got one of the longest track records in the space.
Looking at alternative beta and risk premia from the point of view of managing a discretionary portfolio, we have always thought that it is important to access systematic return streams.
We argue that risk premia and alternative beta should be part of a portfolio, but they are not a panacea to investors’ needs – by no means do they replace an entire alternatives allocation.
GW: You specialise in trend-following, carry and volatility – could you say a few words about each of those?
DL: We don’t think of trend-following as ‘just’ an alternative risk premium – but equally we don’t see it as something that warrants the old hedge fund fee model. What we provide in trend is high-quality, diversified trend-following, but priced in a way that investors have come to expect from their alternative beta allocations.
Within carry and volatility, what we’re doing is extracting the available risk premium across multiple asset classes in a pure way. We have taken two of the most consistent and pervasive revenue streams and then applied them across multiple asset classes, not just developed market currencies or equities, for example.
The desired outcome here is to be diversified, liquid and transparent. It really has a helpful role in an investor’s portfolio.
Importantly, it allows investors to be confident that they are extracting these return streams explicitly, allowing them to focus their attention on other, non-premia driven returns: it means that investors don’t need to worry about whether they are embedding these return streams into a fund because they’re already capturing them. In a way, this shines a light on what investors are actually getting from their other investments – if these other investments have a healthy proportion of trend-following, carry, or volatility for example, then an investor may need to re-evaluate their holdings as they’re already getting those returns streams explicitly through us.
GW: Another phrase we hear a lot about is risk mitigating strategies?
DL: Yes, the focus is on trying to combine a number of systematic alternative betas and often then marry that with trend-following. As part of a wider portfolio this can have a very important role to play – particularly for pension plans that have a large equity exposure.
The focus with risk mitigating strategies and other similar initiatives is to combine the more convex profile of trend-following with systematic alternative risk premiums that over time can perform in their own right and act as a way of funding trend-following during fallow periods, ultimately giving a combination of different types of diversification.
Often, market participants see diversification as downside protection, but in reality combining systematic trend-following with alternative risk premia is a method of achieving different kinds of diversification.
In other words, it is possible to capture some risk-on moves – capture some growth risk but not have to do it by increasing equity exposure. It is also a way of modulating fixed income exposure, something for which we see our multi-asset volatility strategy being used increasingly.
GW: Fulcrum clearly has a strong US presence, led by head of US Paul Seaton. You’re spending a lot of time in the US too – could you maybe talk us through the engagement you have with US investors?
DL: I’ve spent a lot of my career working in the US and with US investors. I spend approximately 1 in every 4-6 weeks in the US working closely with our team on the ground there. The focus is comprehensive. In the North American market, there appears to me to be pressures on current alternatives portfolios, ranging from large pension plans and endowments through to the wealth management area, all of whom have an awareness and growing need to try and capture liquid, diversifying solutions. Our work runs in tandem with this, primarily to create ways in which our skillset can complement what investors are looking for.
One of the key things I’ve found is that a lot of work we’re doing both on the discretionary and the systematic side is enabling investors to find an entry point into alternatives. Those that perhaps shied away from alternatives initially but are continually feeling pressure to move into the space. It’s the work we’re doing that enables them to achieve this. I think we facilitate an entry point.
On a personal level, my role is in part to explain what we’re doing but, most importantly, listening to our investors, providing solutions that are most appropriate and, where applicable, producing tailor-made strategies. It’s a two-way process: listening to our investor’s needs is when meaningful conversations happen for both parties.
In this sense, it’s recognising that a lot of the work we’re doing is ultimately modular; investors can see the building blocks that then get packaged together as the solution – either pre-existing funds or customised. For us, that’s what real transparency means, it means working with the investor. Transparency isn’t just about reams of data and reporting, it’s about working out what’s driving returns, driving the profile, and what helps an investor’s portfolio.
GW: You have a 40 Act vehicle which will hit its 3rd anniversary later this summer in the US. Why did you choose that liquid alts approach in the US?
DL: Yes, we have a 40 Act vehicle of our discretionary strategy. Again, we’ve always tried to listen to our investors and make sure we have our strategies available in the right vehicle for each jurisdiction. The focus is on trying to have a strategy that is not diluted in any way while still being available in the jurisdiction or to a particular investor channel. That applies to North America, Europe, the UK, and Australia.
On the systematic side, we’re keen to follow this route and make sure that the strategies that are in demand are available in a vehicle that is appropriate both for the jurisdiction and for the type of investor with whom we’re working.
GW: How would you describe the demographic of your U.S. investors?
DL: The Fulcrum business has been built on a foundation of an institutional client base. That will continue globally, and specifically in North America. As a caveat, I think the word institutional can mean a wider range of investor types than perhaps it did a number of years ago. There are some very sophisticated, large wealth management outfits that perhaps are not regarded as institutional in the typical sense but have a very institutional approach to investing. The large North American State plans and endowments are where there is increasing demand to capture alternative returns streams, be that through discretionary or systematic strategies, and this is now the case within, for example, the RIA market as well. All share a similar desire to capture this in a liquid, transparent and accessible way.
Investors are now aware that, through firms such as Fulcrum, they can have access to a returns stream that perhaps wasn’t available to them before because of fees or opacity. That is driving demand. The prospect for what we’re doing seems to be very promising – there is a natural demand and a need as we continue towards the later stage of the cycle.
GW: In terms of next steps, what are your ambitions?
DL: The prospects are very exciting for us. With these core business lines, we’re well positioned to continue to offer investors a number of solutions that can address their needs, whether “off the shelf” or customised. On the discretionary macro side, prospects continue to be encouraging – especially for our type of portfolio construction that is coupled with a collaborative approach and which makes use of our systematic business.
We will continue to build out the research side of the business, our focus is not on product proliferation but on incremental and careful improvement to our strategies. Where appropriate this will include additional systematic returns streams that can be applied across asset classes. With this in mind, our work on value will be an interesting addition to our multi-asset, multi-premia strategy, whilst our recent introduction of interest rate swaps both into our carry and trend-following strategies, respectively, are exciting additions to Fulcrum’s underlying systematic strategies.
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