Shifting more money into equities is not an option for many investors due to already maxing out the allocations permitted or taking a view that many equities markets are now looking toppy after the long bull-run.
In the case of Investec Wealth & Investment they have already made a move, as reported here. The firm has pruned £500m from its fixed income allocation and put it into a combination of hedge funds and other alternatives.
Like Investec many will see this as the time to get back into hedge funds, a much maligned asset class post Lehman Brothers and the crisis that followed.
However, there are a couple of problems with this. Performance of many hedge funds during the crisis exposed the limitations of the asset class in preserving capital when markets plummet. Then there is the fact that the investment process and strategy is often kept private, making wealth managers reluctant to hand over client money when they cannot see what is being done with it.
There are a myriad of other options considered alternatives, the likes of private equity and infrastructure being two prime examples, but the answer could be much simpler.
Strategic bond funds are considered an alternative by some, given the big difference in the types of securities and strategies employed versus traditional bond funds. The question is whether they really behave differently to bond funds.
Something interesting has happened recently on this front. Strategic bond funds had been broadly tracking traditional and high yield bond funds in terms of performance but that correlation began to fade away last summer. Until then it would be easy to make the argument that they should be lumped in as a fixed income allocation along with all the other bond funds, but not now.
Liontrust’s head of multi-asset John Husselbee is one investor of the view that strategic bond funds should be considered an alternative, and one which can meet the needs of investors seeking diversification away from bonds.
“While equities can still look cheap in many cases compared to bonds, this may simply be because bonds are artificially priced at the moment,” he said. “People want to bring something else into portfolios that has the lower correlation, defensive aspects bonds have traditionally provided so eyes are on the alternatives sector. Strategic bond funds often sit within fixed income but I would argue they are actually an alternative given that the managers use non-traditional tools and strategies like derivatives.”
F&C Investments’ Gary Potter also sees the diversification merits of a switch from bonds to strategic bonds, although sounded a note of caution.
“The theory is good, strategic bond managers can move money around and have more tools to use,” he said. “But you need to be very selective and choose the right managers. Some strat bond funds are really just high yield bond funds by a different name. If the manager is moving money around well they can offer valuable diversification though because of things like currency overlay, shorting and derivatives.”
“Theory is one thing and practice is another however,” Potter added. “Until we see a big reversal in yields we can’t know how well this works.”
