Alternative investments can be broadly split into two camps – return enhancers and risk diversifiers/reducers. For Husselbee, the commonality between the two is that they tend to have low-to-zero correlation to traditional asset classes.
He adds: “The whole idea of diversification is clearly that a market might be rising while another one is falling and by having a combination of them the average does exactly that – it sits in the middle, with a smoother return.
“If you don’t like bonds, and I can totally understand that, beware that if you totally remove them from the Jenga pile, the whole thing could collapse.”
Discussions about the ‘end of the bond bull market’ and the ‘beginning of the great rotation’ are huge issues that will impact multi-asset funds.
There is also huge scrutiny of the ongoing beta of these portfolios, something Victoria Hasler, head of research at Square Mile Investment Consulting and Research is keeping a close eye on.
“On the whole it is difficult to find funds that are truly equity market neutral as most tend to have some beta in them,” she warns.
“Those absolute return funds with too much beta are those that have tended to disappoint.”
The big asset allocation calls for 2017 will be discussed in the forthcoming January edition of Portfolio Adviser, out in the New Year.
