DIY Investor Magazine
| Oct 2017
24
BROADEN YOUR MARKET EXPOSURE:
A TIME FOR ALTERNATIVE ASSETS?
James de Bunsen
Henderson Alternative Strategies Trust
For as far back as I can remember bonds have been
deemed expensive by all but the most pessimistic of
investors. Yet, arguably, bond prices remain supported
primarily by the actions of price insensitive central
bankers, with their unprecedented monetary policies
and bond buying programmes
Now a consensus seems also to have formed that
almost all equity markets look expensive. The argument
is that, while unattractive on price terms, equities appear
less expensive than bonds. It’s not the most robust
argument for owning a lot of risky assets.
Consequently the appetite for alternative investments
continues to grow, but by their nature alternatives are
less familiar to many investors, leaving many under-
exposed to these assets. And at a time when there is a
major shift in global monetary policy underway, many
portfolios look particularly vulnerable to the threat posed
by elevated equity and bond prices.
I would primarily define an alternative investment as an
asset or strategy that is not a mainstream listed equity
or straightforward IOU-style bond. Alternatives are
generally further styled as such because they might
either be less liquid, more esoteric/complex, or simply
just less well established than their centuries-old equity
and bond peers. Examples would be hedge funds,
private equity, infrastructure, specialist credit, property
and commodities.
Beyond the fact that equities and bonds look fully
valued, there are two key reasons for straying off the
beaten track into the world of alternatives: diversification
and attractive return potential. The former is often
touted as the main reason for investing in alternatives;
one of the key tenets of portfolio construction is that
by combining securities or assets that have a relatively
low correlation to each other generates more attractive
risk-adjusted returns. (For example, equities and bonds,
whose prices follow fairly independent paths due to the
differing sensitivities they have to such factors as growth
and interest rates, are often paired together.)
However, the potential returns on offer are often
surprisingly viewed as a secondary attraction. Private
equity in particular has historically outperformed
publicly listed shares, and while hedge funds’ returns
in recent years have been more muted they have been
achieved with much lower risk than mainstream equity
markets. Property likewise has been a great place to be
invested, as has infrastructure and specialist areas of
the credit markets. Only commodities have disappointed
in recent memory, undermined by a marked slowdown
in Chinese investment (but gold has proven to be a
decent diversifier against various geopolitical and
inflation risks).
In Henderson Alternative Strategies Trust, a fund I co-
manage with Ian Barrass, we analyse alternative assets
in a similar framework to how we look at mainstream
assets. Macro-economic factors such as economic
growth, the credit cycle – the changing availability of
funds to borrowers over time – and the direction of
interest rates are just as important to alternatives as they
are to equities and bonds, therefore we need to take
these into consideration and allocate capital to different
asset classes accordingly.
Diversification characteristics are equally important as
value when constructing a portfolio.
A HEDGE FUND SHOULD NOT BE A MORE RISKY
INVESTMENT THAN THE EQUITY MARKET
