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SIMON BROWN: I’m chatting now with Dino Zuccollo, Head of Investor Solutions at Westbrooke Alternative Asset Management. Dino, appreciate the early morning. In a note you put out earlier in the week – a nice bold statement, I love a bold statement – you’re saying the traditional 60/40 portfolio, 60% equities, 40% bonds, is simply not fit for purpose any more.

DINO ZUCCOLLO: Good morning, Simon. It’s a pleasure to talk to you again. Yes. I think the body of knowledge that exists globally would support that thesis. What we’ve seen since interest rates have shifted so much globally, Simon, is that where the traditional 60/40 portfolio – which incorporated really a 60% allocation to equities and 40% to bonds – used to work really, really well because when equities ran bonds underperformed; but then when equities underperformed bonds used to be the shock absorbers of client portfolios. That is no longer is the case, and that’s because of inflation.

And statistically when inflation is in excess of 2.5% per annum the correlation between stocks and bonds becomes positive. What that means is that we’ve got more volatility in investment portfolios. At the same time, Simon, we’ve seen a big trend globally of delistings. And so now what you’ve got is more market cap concentrated in fewer stocks which are all moving in client portfolios in the same direction.

So I think what we’ve seen as a global trend is a big shift away from the traditional 60/40 and maybe incorporating more 40/30/30, where that delta of 30 comes from an allocation to private market assets or, as I prefer to call them, alternatives.

SIMON BROWN: Absolutely. And that’s the key point. In some senses they’re kind of giving you a bit of a benefit. It depends. There are different types of alternatives that you can invest into. There is private credit, there’s private equity – and so the list goes. Importantly, it’s kind of filling in where the bonds used to, which gives you perhaps lower volatility, a different return profile for the investor.

DINO ZUCCOLLO: Yes, absolutely. A private market asset, Simon, is oftentimes investing into the same type of underlying instrument as you would in a traditional investment. So private equity investment is very much akin to a listed equity share. Of course the big difference is that it is not listed. The trade-off is that you can’t get your money out quickly; your money is tied in for a period of time.

But the benefits are significant. You can have higher returns because you can now get clever with the underlying types of assets that you invest into – of course, if you’re investing alongside a skilled manager. But you can also get less volatility and of course get clever with things like tax efficiency and the like.

I think what we’ve seen in the market at the moment and in our release to you, Simon, earlier this week, spoke to our new Hybrid Capital Fund; it’s that we’ve seen specific niches in different markets where there is the opportunity to get asymmetric returns. That’s a higher return for a client than the level of risk that you need to take, which is obviously much harder to do in the listed markets.

Hybrid capital investing I think is a great example of that, where you lead in the investment with some form of a debt instrument but, because you’re now a key lender to generally a private equity-led transaction, you’re able to get clever with negotiating some level of equity upside for your investor.

Certainly we’ve seen a gap there because, as interest rates have gone up, the traditional lenders have pulled back significantly from markets like the UK, where this offering is based.

SIMON BROWN: And not all private alternatives are equal. We have to state that upfront. In some of them – I think of private equity – the challenge there is around exiting. And that’s always been the challenge. It’s less of an issue where you guys sit, a lot of which is that private debt, because I imagine it’s a range of clients, but also these are term contracts.

DINO ZUCCOLLO: Yes, 100%. Look, a lot of this conversation, Simon, is around who your investor is. If you’re investing on behalf of, say, institutional clients or a very large family office, they might be comfortable with having a little more opaqueness around exits.

But certainly if you look at Westbrooke’s client base, which comprises a lot of ultra high net worth individuals, even high net worth individuals and wealth advisors, their clients want to have certainty around when they’re going to get their money back, and in the world of private equity that absolutely is more complex.

And so if you look at debt or Hybrid Capital in this instance, the beauty of it is that in hybrid capital investing, for example, because you’re leading with a debt instrument you have a defined contractual exit term. But because you’re able to invest in some level of the equity of the businesses that you’re investing into, you also can play and participate on the upside to the extent that those businesses perform.

So it’s a great way for you to be able to get higher returns. And to give you some context on that we’re talking in this new offering of ours about 15%-plus in pounds. So you are sort of participating very close to what historically an equity return would look like, but with lower risk and a much more clearly defined contractual interest and exit term.

SIMON BROWN: A last question – and we’ve chatted about this before – South Africans traditionally have been lagging in in the alternative investment space. There’s undoubtedly interest. Are we picking up that number? Are we growing in terms of how much of our investments are going into alternative investments?

DINO ZUCCOLLO: Definitely, Simon. Our new Dynamic Opportunities Fund, which I’ve been speaking about this morning, has now got R3.8 billion available for investment into the UK hybrid capital market. That really is a partnership that we’ve done with Rand Merchant Bank in South Africa, and from the Westbrooke side has been funded by exactly those clients that I’ve mentioned – ultra-high net worth, family office and wealth. That’s a material number. Ironically it’s only £155 million.

The pounds relative to rands is an interesting conversion. But certainly I think this is one of the larger offerings that we’ve brought to market, and I’d say probably one of the larger market offerings for alternatives in this country this year.

So I think the numbers speak for themselves – that the popularity of alternatives in South Africa is increasing. But definitely we have a very long way to go. Some of the impediments include things like client knowledge and understanding, but also accessibility. A lot of the world of investing in our country is centred around platforms and buying things through platforms which traditionally were set up to accept listed and liquid instruments, not alternatives.

So there is a way to go and there is a journey to go. But increasingly, as we’ve seen the trend in the first world, clients are being forced to seek alternatives in order to futureproof their portfolios going forward.

SIMON BROWN: Yes. And R3.8 billion is a big number, make no mistake.

We’ll leave it there. Dino Zuccollo, Head of Investment Solutions at Westbrooke Alternative Asset Management, I always appreciate the early morning insight.

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