One of the big differences between equities, bonds, property and cash and today’s vogue for multi-asset strategies is the addition of alternative assets and in recent years it is these that have increased in importance.
Recently we have written about the gradual decline of funds of hedge funds – a big chunk of these so-called alternatives – so what else is left and how important are they to private client portfolios?
According to research from Architas, alternatives make up 12% by value of the funds within the IMA’s mixed investment sectors. Of this 12%, hedge funds make up 20%, just behind commodities with 22%; the rest is absolute return (17%), property (14%) and private equity tailing in at 8%.
The use of alternatives increases as part of the asset allocation changes from Mixed Investments 0-35% to 40-85% and then the Flexible Investment category.
Architas’ conclusion is their research gives advisers full transparency into the sector, which it does very well indeed.
What advisers consider on top of this, as well as whether the asset allocation meets the diversification needs of the client, is the return profile of the underlying funds within the IMA Mixed Investment sectors.
Looking at the past year’s returns, even the most defensive 0-35% in shares category has a spread of returns from 18.4% (Stephen Jones’ £273m Kames Inflation Linked Fund) to -4% from the £52m Way Global Cautious Fund run by Trevor Chanter.
Looking at what Architas would define as ‘alternative’, Jones holds 67.3% in gilts (aren’t they ‘alternative’ for most investors right now?) and 4.3% in commodities while Chanter holds 10% in absolute return and 5% in commodities. He also holds 8% in life settlements which isn’t even mentioned in what is significant and exhaustive research.
Alternatives is as subjective a term as risk, or cautious, or aggressive, so there is never going to be one standard definition of any of these terms.
Once again, it really doesn’t matter what something is called – what is important is what does it do and how does it work with other investment strategies/asset classes/securities?
