Acrophobia is more common than you might think. A feeling of giddy unease as you enter the lift, the heart races as you ascend, before utter dread as you step out on to the platform several stories up.
The secret, they say, is to not look down. Transplant the analogy to equities, and there are plenty of acrophobic investors today, terrified by downward potential of the FTSE 100 above 7,000 points and the S&P 500 above 2,200.
Is it right to be bearish now? Maybe, maybe not. The point of this article is not to debate the future direction of markets, rather to explore the options available to those investors who are looking to de-risk and take more defensive positioning in the months ahead. The worry is that there are fewer choices than one might first think.
As Standard Life Investment’s Bambos Hambi reveals in this month’s asset allocator (pages 46-49), the decision last year to sell out of government bonds left the MyFolio team with something of a dilemma, before it beefed up its investments in absolute return strategies.
Real alternative
The problem is that many of the available defensive absolute return strategies do not have track records over a full market cycle, while other traditional alternatives, such as property and private equity, have had their own problems in recent times, particularly in terms of available liquidity.
Still, the pallet of available alternatives has grown markedly in recent years, provided wealth managers are willing and able to put in the time and hard work to access their viability and risk/return profiles.
Andrew Herberts, head of UK private client investment management at Thomas Miller Investment, talks of the alternatives space becoming “vitally important” in the next cycle.
This is on the basis that excessive quantitative easing has meant assets that should be negatively correlated with each other have moved closer together.
He cites genuine alternatives that have a store of resilience. This includes the parts of the property market whose tenants are not affected by the economic cycle, for example student accommodation and GP surgeries, via MedicX and PHP.
“Some of the mature private equity plays look interesting, particularly as you can buy these at a discount to Nav at a point where they are realising value, such as Pantheon International and HGCapital,” he says.
“Also, in infrastructure we own HICL, IPP and The Renewables Infrastructure Group. We are diversifying our underlying revenue flows as much as possible.”
Exercising caution
Waverton’s multi-asset Cautious Income Fund invests in asset-backed securities, property, infrastructure and peer-to-peer lending. Large holdings include GCP Infrastructure and Student Living, while also in the portfolio is Pimco MLP & Energy Infrastructure Fund.
The latter is an interesting case in that it aims to benefit from growth in the North American energy sector by investing in the debt and equity of master limited partnerships (MLPs) and related energy companies. Benchmarked against the Alerian MLP Index, in the 12 months to the end of January, the fund delivered a beta of 1.18 and a Sharpe ratio of 0.89.
Waverton has another tool in its armoury in terms of diversification and managing against downside risk. It has its own internal protection strategy, which comprises between 15 and 20 underlining securities, including equities, fixed income, volatility futures and rolling put indices.
Manager James Mee says: “In hedging against systemic risk-off, we have bought a nine-month put on the S&P 500, which we hope to sell before the period ends. It has a 35bps cost but we can’t lose more than that.”
