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Investing in Alternatives – September 2016

    Investing in Alternatives – September 2016


    Sarasin & Partners’ ‘Compendium of Investment’, published in January 2016, lists the following under alternatives: hedge funds, private equity, infrastructure, commodities, agriculture and collectibles. It is a diverse range of investments that are becoming increasingly appealing to UK investors.

    Willem van Dommelen, head of multi-asset systematic strategies at NN Investment Partners, observes: “Generally speaking we see an increasing appetite for these types of investments. I think this can be explained by a few macroeconomic factors that we are facing in the low-yield environment.

    “Credit spreads have been low and become even lower over the past year and so there’s not the expectation this will drive returns going forward.

    “Investors are more or less being forced to look for other investments beyond the traditional fixed income and equities to get a return, so anything that’s yield-generating is receiving increased attention. That applies to infrastructure-type [investments], but also more hedge fund-like or alternative investment-type strategies.”

    Mr van Dommelen explains that equities and fixed income can be highly correlated in stressed markets, which is why investors may allocate to an alternative investment.

    “You need to balance your investments as well as possible and in general terms adding alternatives that are uncorrelated is something you should do at all times, but especially if you are less certain about the markets,” he says.

    Mariana Enevoldsen, director at Heritage International Fund Managers, notes: “I think alternatives have produced good returns for investors in the climate of low interest rates. And as [rates] have continued to drop we think there will be more demand for alternative investments.”

    While investment trusts are perhaps better known for providing exposure to the space, many open-ended funds also offer exposure to specific listed alternative investments, including infrastructure and private equity.

    Figures from the Association of Investment Companies (AIC) show how popular closed-ended vehicles are for accessing alternative asset classes. In the first half of 2016 the private equity sector was the third-largest investment trust sector by total assets, climbing to £13bn, having been the second-biggest category a decade ago with assets of £10bn.

    The AIC Sector Specialist: Infrastructure group is now the fifth largest investment trust sector with total assets of £8bn, compared with just £246m 10 years previous.

    AIC chief executive Ian Sayers observes: “The rise of alternative assets, such as property and infrastructure, illustrates not just the demand for yield, but also the suitability of the closed-ended structure when it comes to investing in illiquid assets. This structure, which allows managers to take a long-term view without having to deal with the problems of large-scale redemptions, also means that the sector is well-placed to weather any challenges that lie ahead.”

    As the figures suggest, alternatives are becoming more mainstream, also adding to their ongoing appeal among UK investors.

    James Christie, also a director at Heritage, says: “When you get to a situation where you have regional authority pension funds investing a proportion of their portfolio in alternatives, you can gain a degree of comfort that they are far more mainstream than they were 20-25 years ago.”

    Ellie Duncan is deputy features editor at Investment Adviser

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. The AIC Infrastructure sector is now the fifth largest investment trust sector with total assets of how much in the first half of 2016?

    2. How many constituent funds are there in the AIC Private Equity sector?

    3. What are the average returns delivered by private equity over the past 10 years?

    4. In the year-to-date to August 18 the AIC Infrastructure - Renewable Energy sector gained how much?

    5. According to the UK’s National Infrastructure Delivery Plan what is the pipeline for UK projects from 2016-2017 onwards worth?

    6. In 2008 there were fewer than 300 alternative Ucits in Europe - how many are there today?

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