Infrastructure holdings are also trading at discounts of 20 per cent to the value of their underlying assets, which leads us to expect better future returns in this area.
On the other side of this correlated allocation, private equity also faced challenges in 2022, but made a recovery in line with broader listed markets through 2023 and the start of 2024.
The other side of our alternatives portfolio contains assets that we label as uncorrelated. These provide a return source that moves to its own beat and helps stabilise the portfolio in volatile and unexpected market conditions.
Over the past year, this part of the portfolio held up strongly, partially thanks to our decision to make a meaningful allocation to gold. This decision was driven by our thematic work that showed mounting geopolitical risk and rising government deficits were likely to drive up the gold price as it remains the ultimate store of value.
What happens to alternatives now?
Alternatives have a compelling long-term history of differentiated returns. The recent period has been disappointing, but our assessment shows that valuations have now corrected to reasonable levels and the macroeconomic backdrop has improved.
We have seen evidence that this may be beginning to bear out this quarter.
During the equity and bond market wobble in April this year, we saw alternatives hold their ground.
Alternatives have produced what we consider to be respectable positive returns that are ahead on bonds and not far behind equities.
After an unusually difficult period we may be seeing signs of improvement, which should renew investors’ faith in alternatives.
Alastair Baker is a portfolio manager – multi-asset at Sarasin & Partners
