In the lead up to this week’s The Insider: Meet the Fund Manager, Anthony Murphy from Lucerne Investment Partners (“Lucerne”) sat down with Reach Markets to provide a bit of information about the Lucerne Alternative Investments Fund, its investment strategy, industries of interest and view on the market.

LAIF has developed an evidently effective investment process that has produced quality risk-adjusted, market-beating returns, and was awarded “Best Multi Strategy Fund” at the 2022 Australian Alternative Investment Awards.

As of 31st December 2022, LAIF produced a 3-year annualised return of 14.07%, compared to the ASX 200 Accumulation Index’s (AXJOA) 6.6%. During this period, LAIF’s annualised volatility was 7.38% against the index’s 18.14%, and its Sharpe ratio was an impressive 1.91 as opposed to 0.36 for the ASX 200 Accumulation benchmark. 

A particularly interesting metric is LAIF’s average negative month – to which Mr. Murphy largely attributes Lucerne’s long-term outperformance. It is also a direct by-product of LAIF’s dynamic investment approach, aligning the portfolio to suit prevailing macroeconomic conditions. LAIF’s average down month is -1.5% compared to the AXJOA’s, -4.49%. Downside protection was especially evident during the February/March 2020 covid crash, where LAIF retracted approximately 6% during this period, while the AXJOA was down approximately 25%.

Fundamentally, Anthony believes we are entering a prolonged bear market. While no one can predict with absolute conviction what will happen to the economy over this coming difficult period, the warning signs are starting to show and that has led the LAIF Investment Committee (IC) to err on the side of caution. Examples include the continued central bank rate increases, the fixed interest mortgage cliff being faced by 800,000 Australian households, a recent rise in unemployment, global tech layoffs and major miners cutting dividends – especially BHP slicing theirs by 40%. The fundamentals of investment market conditions have changed, with the era of continuous declining interest rates up until the end of 2021 ending suddenly, significant reduction of record government and central bank stimulus being implemented whenever economies were struggling, governments and central banks are now committed to taming inflation and cooling the economy.

LAIF focuses on the themes that should prevail in macroeconomic conditions over a 12 to 24-month period. Some recent themes that have contributed to LAIF’s performance include inflation (strengthening agriculture and energy prices), sharp declines in bond prices and increasing interest rates. LAIF identifies fund managers that are able to capitalise on these trends with investment expertise and provides them capital to do so while the trend is still active – but equally adjusts weightings down once this trend has dissipated. An example of this would be increasing LAIF’s portfolio exposure to International Standard Asset Management (ISAM) in July 2021 from 5% to 8% – prior to ISAM producing a return of over 60% in FY22. The position was subsequently reduced from 13% back to 5% after this period of abnormally high returns.

LAIF also carries an overweight position in resources, specifically with managers that have a strong track record of protecting downside but still producing double-digit returns throughout the market cycle. Positioning in the resources space is important, and one strategy LAIF employs involves initially investing into high-growth resources companies via debt (with a yield of 8-12%) with the ability to convert this position into equity if attractive equity returns can be realised. Another strategy LAIF entered in 2022 is the Regal Resources Long Short Fund, which was the best performing resources fund in Australia last year.

Join Anthony Murphy this Friday, 3rd of March, at 12pm (AEDT) on our weekly The Insider: Meet the Fund Manager webcast to hear him talk about his favourite stocks, investment strategy, market insights and more. There will also be an opportunity to ask questions during the session. To book yourself in, click here.

Past performance is not a reliable indicator of future performance.

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