Alternative assets cover a variety of opportunities not all of which offer reduced volatility, according to a range of wealth managers.
Rory Maguire, managing director at Fundhouse, said he was a sceptic when it came to the volatility-dampening potential of many alternative assets.
He said: “Over time, we believe that alternatives (like absolute return) bring a few challenges to investors/asset allocators. First, the managers of these absolute return funds change their views so frequently, that it is hard to know what insurance policy you are actually buying. Is it an equity hedge? Is it a bond hedge? If it changes that frequently, it is hard to say.
"This places the investor in a predicament when doing portfolio construction, especially if they require each investment to play a precise role in the portfolio. They can invest on the hope that the asset is uncorrelated and works when they need it to. Or, they can avoid it. Historically, we have taken the latter approach.
"Second, costs can be high. And, finally, our fund research has rated many absolute return strategies negatively and this reduces the odds of finding a successful strategy (in our experience). When adding all these factors together, we generally avoid this sector when investing in our model portfolios."
Part of the rationale for owning alternative assets is they can offer returns unlinked with those of equities or bonds, and perform best when those asset classes are doing less well.
Matthew Yeates, deputy chief investment officer at 7IM, said: “If volatility dampening is the only goal, investors may be better off just owning more cash to bring volatility down. However, if they seek an explicit diversification (ie a negative correlation) with equity markets that’s where genuinely defensive alternatives can help, as per the example of trend following.
"Alternatives, like many other areas of markets are also seeing fee pressures. However, many of the strategies being deployed are more research or implementation intensive, given the goal is to be market neutral, which we think justify the associated fees. For strategies that are just recombination of traditional betas though (in bonds or equities), we would not be willing to pay higher fees, as investors would be better off owning the passive vehicles with the same exposures to those underlying betas, even if there is some element of “alpha” on top.”
But Simon King, chief investment officer at Vermeer Partners, said many assets were ultimately priced relative to bonds or equities, and so might more accurately be called “other”, rather than alternative.
Of their place in portfolios, he said: “The last 15 years is either the dreaded new paradigm where everything is correlated or just a blip created by the liquidity of QE etc. We certainly think things like private equity are merely normal equities with a lot more gearing and a pricing delay. They can all dampen or increase volatility in the short-term. It is the long-term that matters to our clients.”
Ross Crake of Osprey Wealth said 2022 was a year in which many of the asset classes marketed as alternative proved capable of delivering returns only in line with those of the bond market.
Mark Lane, head of active funds at Progeny, said while some alternative assets did offer a diversification away from bonds and equities, those were, by nature, low-returning and to make them more appealing to potential clients providers tended to use debt to amplify returns.
The use of leverage creates a different type of potential vulnerability, and leaves the returns vulnerable to higher interest rates.
Simon Molica, senior investment manager at Parmenion, said many assets, such as physical property, could appear to investors to have low volatility, but this was often a function of those assets being priced relatively infrequently, rather than due to stability of price.
david.thorpe@ft.com
