Also, in some cases, the underlying investments are not as regularly traded as equities and bonds so there is more liquidity risk. This is factored in during the research process.
We believe a portfolio of appropriately sized alternative asset holdings with their own individual risk characteristics can play an important role in a balanced multi-asset portfolio from both a risk and return perspective.
Communication breakdown
Before the Russian invasion of Ukraine, we had been adding exposure to renewable energy generation as energy prices rose sharply in 2021.
Since the invasion, we have added further investments in solar energy while the fund’s exposure to wind generation has been a useful diversifier year to date. We believe that although power market forecasters are predicting that renewable generation will lead to lower electricity prices over the long term, in the medium term the revenues available to these companies with power market exposure has significantly increased.
We have also recently been adding exposure to property, which, as a real asset, tends to benefit from inflationary environments. We have added an investment in German residential property, where we believe the structural supply/demand imbalances offer an attractive opportunity.
We also opened an investment in an owner of student accommodation, which had been trading at a significant discount to asset value, but we would expect the share price to positively rerate as the company recovers from the impacts of Covid-19.
Diversification is the primary risk management tool available to multi-asset funds – this relies on historic correlations to balance equity portfolios with allocations to bonds, cash or even gold.
When these correlations break down, the theory on which these portfolios are modelled and structured falls down. If your diversifying assets lose value at the same time as your equity portfolio, as has been the case with bonds this year, then the choice you are left with is to reduce the riskier parts of your portfolio and hold more cash. This clearly reduces risk but at what cost to the potential return of the portfolio?
While diversification, through an allocation to alternatives, plays an important role, having the flexibility to use derivatives means risk can be managed in a more targeted way through expressing bearish views on markets.
We actively manage a combination of reactive portfolio hedges with investment strategies that are designed to perform in prolonged market drawdowns or tail-risk events such as the Covid-19 crash. This means we are not forced to hold assets we do not want to. Having that flexibility is an important tool at a time of such high uncertainty and volatility in financial markets.
