While bonds and traditional equity remain the mainstay of the majority of multi-managers’ portfolios, there are other, more esoteric, options included by some to add diversification.
Indeed, key trends are emerging of alternative asset classes being included more frequently because of the strength of their fundamentals, and the boost they can offer to performance while dampening volatility.
“Using alternatives comes back to the first principle of the fund: to achieve a diversified portfolio,” says Mark Parry, senior investment manager within the multi-asset team at Aberdeen Asset Management. “It can also help us in our goal of seeking growth as well.
“One area where we are finding good opportunities at the moment is in infrastructure; we own a selection of listed UK vehicles, each of which has a portfolio of infrastructure projects that are up and running.
“It offers strong income generation – in excess of 6 per cent gross yield – and, while it does have a degree of equity market risk, it has low correlation to traditional equity markets.”
Ian Rees, head of research at Premier Asset Management, is also a backer of infrastructure investments, particularly those that finance government-backed projects, as these offer extra security to investors.
“The ultimate exposure is almost like a government bond – it is a gilt proxy – loaning money to build projects that the social purse is providing cashflow to, making sure these projects get done,” he says. “The government has still got a five-year pipeline of £200bn of projects that need to be financed, so it is a continuing and healthy story.”
Meanwhile, Mr Rees is also interested in alternative bond assets, welcoming the way in which a multi-asset approach can open up different investment structures over and above open-ended funds.
As such, the Premier multi-asset fund range has exposure to direct property lending funds, infrastructure debt, secured loans and mortgage-backed securities.
“We are trying to exploit the fact that banks are trying to de-lever their balance sheets and there is effectively a funding gap,” Mr Rees explains. “For capital providers who are able to step in and provide this sort of finance, you are getting very attractive rewards, with much better security than you have probably had with these sorts of securities in the past.”
With alternatives used primarily as a way of increasing diversification, managers are often seeking asset classes that have low levels of correlation to equities and bonds.
This can be difficult to achieve, particularly for multi-managers who are accessing them through a third-party fund, as most asset classes have some link to the movements in those markets. For example, property exposure may blend some direct property with property companies and real estate investment trusts, upping the correlation to traditional equity markets. For Max King, portfolio manager in the global asset allocation team at Investec Asset Management, the way around that issue is to categorise assets in terms of whether they offer growth, defensive qualities or uncorrelated returns.
