Why we like alternative assets

Investors have traditionally sought to smooth portfolio returns by holding government bonds. A typical “balanced” portfolio might comprise 60% equities and 40% bonds. This approach still has merit. Although they are expensive, government bonds could perform well in periods of equity market volatility and help protect portfolios. They are a particularly attractive hedge against “deflationary” shocks - when both economic growth and inflation fall. This was the case when the pandemic hit in early 2020. 

In general, however, markets are today more concerned about high inflation. In this scenario, government bonds offer a less attractive hedge. We and other investors have therefore been reducing bond allocations in favour of “alternative” asset classes. Here, we look in more detail at two key alternative assets that we think boost portfolio diversification and enhance long-term, risk-adjusted returns: private assets and absolute return funds.

Private assets

Private asset markets have demonstrated their ability to enhance returns, without significantly increasing portfolio risk. While some investments may involve committing capital for long-periods of time, the opportunity can also be accessed through more liquid vehicles. We work with experienced managers and build diversified exposure in both private equity and private debt. Within the former, growth opportunities are playing an increasingly important role: companies are staying private for longer than in the past, with the average age of a newly-listed company more than doubling over the past 20 years to 12 years. We also have allocations to more traditional “buyout” strategies that create value by repositioning and restructuring mature companies.

Absolute return funds

Absolute return funds are designed to deliver steady returns irrespective of market conditions. We look for managers with a rigorous and repeatable investment process operating in liquid markets. Crucially, their returns should exhibit a low correlation to equity and bond markets. We aim for a high degree of diversification within our allocation to these strategies, selecting funds focused on different asset classes and  regions. 2020 offered a useful illustration of the role that absolute return funds can play in multi-asset portfolios. Despite the very sharp moves in both equity and bond markets early in the year, absolute return delivered a stable performance with low correlation to either asset class. They helped protect portfolios in the first quarter and contributed positively to returns over the remainder of the year.

Our absolute return funds performed well in 2020

^{Source: Cazenove Capital}

The securities referred to in this article are for illustrative purposes and are not to be considered a recommendation to buy or sell. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.