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How alternative assets can boost performance

Three multi-managers share their strategies for investing in assets uncorrelated to shares and bonds.

 

by Max Skjönsberg on May 19, 2014 at 09:41

How alternative assets can boost performance

Certain assets are labelled alternative thanks to their ability to provide returns uncorrelated to bonds and shares. Many multi-managers use such assets in an attempt to buck wider stock market trends.

Caspar Rock, chief investment officer and manager of the £2.6 billion Architas multi-manager fund range, views alternative assets as important tools and has always used them in his multi-manager portfolios. ‘With alternatives, we are looking for assets where the underlying drivers of return are different, to a greater or lesser extent, to shares or bonds,’ he said.

While a user of such obscure assets as catastrophe insurance, via the CATCo Reinsurance Opportunities Fund, Rock warns that alternative assets can be illiquid.

He said: ‘With alternatives you are generally taking on some form of liquidity risk. The way most people access them is through investment trusts, and then the liquidity risk is the discount to net asset value; because nobody wants to buy it the day you want to sell it. We make sure that no individual fund gets close to 15% total exposure to investment trusts.’

In a similar vein, Citywire + rated Bambos Hambi, manager of the £4.2 billion MyFolio range at Standard Life Investments (SLI), said: ‘With the alternative asset classes we use we are looking for different volatilities and correlations from equities and bonds. But we need to have long track records before using something.’

Commercial property

The investment volume for commercial property in 2013 reached £48.5 billion, up 45% on 2012 and the highest level since before the financial crisis, according to estate agent Knight Frank.

Commercial property is the main alternative asset class in Hambi’s MyFolio range. ‘It’s an asset class we want exposure to and even in our fund of trackers we have an active bricks and mortar fund, because it’s an asset class you cannot access via a passive [tracker] fund. We want bricks and mortar rather than property equities because it has low correlation to other asset classes and low volatility. All our property exposure is UK-centric,’ said Hambi. 'We have added to it and it’s now one of our largest tactical asset classes.'

While bullish on the asset class, Hambi warned that it was illiquid by nature. ‘There are times when you have liquidity issues, as we saw during the credit crisis. To manage that we use four different managers,’ he said.

Hambi uses SLI UK Property , managed by Nigel Chapman; Henderson UK Property , managed by Marcus Langlands Pearse and Ainslie McLennan; M&G Property Portfolio Sterling , managed by Fiona Rowley; and the Ignis UK Property fund , managed by George Shaw.

By contrast, Rock, who holds commercial property via the F&C Commercial Property trust, would not classify commercial property as an alternative asset.

Specialist property

The property investment universe is becoming increasingly diverse. Rock seeks to diversify his exposure by looking at obscure market areas. ‘Specialist property is where you are buying exposure to a specific part of the property market that could give you diversifying benefits. Example number one is MedicX Fund, which only owns doctor surgeries,’ he said.

Another highly specialist fund in Rock’s portfolio is Ground Rents Income fund, managed by Braemar Estates, the specialist property management division of Brooks Macdonald.

‘What you want to achieve with specialist property is longer leases, different credit risk. In general you are buying long duration assets with some kind of inflation protection. We have a preference for income-generating alternative assets and you have a high yield in many of these specialist property funds. And they are moving from zero capital growth to a couple of per cent growth each year,’ said Rock.

Commodities

Many investors have shied away from commodities because of the perceived slowdown in the Chinese economy, which has been the driver of commodity prices for many years.

Gold has been especially volatile in recent years, with the price dropping from around $1,900 (£1,126) an ounce in the second half of 2011 to the current range of $1,200-$1,400 an ounce.

Bill McQuaker, head of multi-asset at Henderson Global Investors with responsibility for a multi-manager range with £6.4 billion in assets under management, has a physical gold exchange-traded fund (ETF) from ETF Securities in most of his multi-manager funds.

‘Gold is a good hedge against many risks. We don’t have a target price, because it’s incredibly hard to value. But it has worked as a hedge against inflation and geopolitical risk,’ he said.

However, McQuaker takes issue with the labelling of gold as a safe-haven investment. ‘It’s a complete misnomer to call it [that], which some people do. It showed such characteristics for a while, like during the eurozone crisis, but it’s clearly a highly volatile asset. We had a larger amount in 2011 and 2012, but we cut it back as it fell.

‘But we have added to it this year as we could see the $1,200 an ounce mark as a floor,’ he said.

Apart from gold, McQuaker has limited exposure to commodities. Similarly, Rock has had more exposure to commodities in the past.

‘We sold down well over a year ago. Historically, commodities have always been early-cycle investments, and we are later in the cycle,’ he said.

Hambi has never been invested in commodities and it is not one of the 14 asset classes MyFolio invests in.

Absolute return

Absolute return funds, which take positions in foreign exchange markets and make use of derivatives, have gained in popularity.

One of the biggest player’s in the sector is SLI Global Absolute Return Strategies (Gars). It is also a core holding in Hambi’s MyFolio range. ‘We are also using the SLI Absolute Return Global Bond strategy, which is targeting volatility of less than 5%. So our absolute return exposure is a mix of growth and defensive assets,’ he said.

Gars is a fixed cornerstone of each of the portfolios in the MyFolio range, from 5% to 20%. Hambi takes issue with the suggestion that it could be a sign of bias to have such a large allocation to another Standard Life product.

‘Gars is a fund that a lot of people use. Gars has showed it can make money even in falling markets. It’s a great shock absorber for us. In the absolute return space there are apples and pears mixed together,’ he said.

McQuaker is also a keen user of absolute return instruments as diversifiers. ‘We think absolute return funds, similarly to hedge funds, are good diversifiers,’ he said.

One of the prominent absolute return funds in McQuaker’s range is the Ignis Absolute Return Government Bond fund, managed by the Citywire AA-rated quartet of Stuart Thomson, Russ Oxley, Adam Purzitsky and Paul Shanta. ‘It is totally uncorrelated to fixed income or equities. The team running it has some proprietary software it uses for slicing and dicing the yield curve,’ he said.

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