Multi-managers turn to infrastructure for diversification

Indeed, key trends are emerging of alternative asset classes being included more frequently because of the strength of their fundamentals, and the boost they can offer to performance while dampening volatility.

“Using alternatives comes back to the first principle of the fund: to achieve a diversified portfolio,” says Mark Parry, senior investment manager within the multi-asset team at Aberdeen Asset Management. “It can also help us in our goal of seeking growth as well.

“One area where we are finding good opportunities at the moment is in infrastructure; we own a selection of listed UK vehicles, each of which has a portfolio of infrastructure projects that are up and running.

“It offers strong income generation – in excess of 6 per cent gross yield – and, while it does have a degree of equity market risk, it has low correlation to traditional equity markets.”

Ian Rees, head of research at Premier Asset Management, is also a backer of infrastructure investments, particularly those that finance government-backed projects, as these offer extra security to investors.

“The ultimate exposure is almost like a government bond – it is a gilt proxy – loaning money to build projects that the social purse is providing cashflow to, making sure these projects get done,” he says. “The government has still got a five-year pipeline of £200bn of projects that need to be financed, so it is a continuing and healthy story.”

Meanwhile, Mr Rees is also interested in alternative bond assets, welcoming the way in which a multi-asset approach can open up different investment structures over and above open-ended funds.

As such, the Premier multi-asset fund range has exposure to direct property lending funds, infrastructure debt, secured loans and mortgage-backed securities.

“We are trying to exploit the fact that banks are trying to de-lever their balance sheets and there is effectively a funding gap,” Mr Rees explains. “For capital providers who are able to step in and provide this sort of finance, you are getting very attractive rewards, with much better security than you have probably had with these sorts of securities in the past.”

With alternatives used primarily as a way of increasing diversification, managers are often seeking asset classes that have low levels of correlation to equities and bonds.

This can be difficult to achieve, particularly for multi-managers who are accessing them through a third-party fund, as most asset classes have some link to the movements in those markets. For example, property exposure may blend some direct property with property companies and real estate investment trusts, upping the correlation to traditional equity markets. For Max King, portfolio manager in the global asset allocation team at Investec Asset Management, the way around that issue is to categorise assets in terms of whether they offer growth, defensive qualities or uncorrelated returns.

“With uncorrelated assets, we do not expect them to be correlated with other growth assets,” he states. “In that space we might put commodities such as gold, infrastructure, certain trading strategies and insurance strategies.

“However, that list can change, as the level of correlation can change over time. It can, in actual fact, be difficult to find truly uncorrelated assets at some points in the cycle.”

This has certainly proved to be the case with commodities and, in particular, gold, which has traditionally been seen as a good defensive asset class with low levels of correlation to equities. It has, however, fallen out of favour with some multi-managers as its characteristics have changed over recent years.

As Mr Parry explains: “Gold was a very interesting asset to us at the time of the financial crisis, not as a safe haven, but because of its low correlation with risky assets. Post-crisis, it became more correlated and was, in fact, a proxy for the equity markets. That correlation has lessened now, but they are still more highly correlated than they have been in the past, which is why we only have a modest holding.”

Laura Mossman is a freelance journalist

Spending structural investment spending

£3bn - The increase in infrastructure capital spending plans per year in 2015 to 2016, announced by the chancellor in the 2013 Budget

July 2013 - The month by which the government will produce technical planning guidance relating to shale gas

13% - The approximate increase in the average annual UK infrastructure investment between 2005 and 2010 and 2010 and 2012

£8.5bn - Average spend per year on energy infrastructure in 2011 and 2012

£13.7bn - Average spend per year on transport infrastructure in 2011 and 2012

£310bn - Amount of infrastructure investment planned from 2012 to 2015 and beyond

Source: HM Treasury