Advisers are increasingly turning to alternatives, and discretionary fund managers (DFMs) to multi-asset funds, as the search for bond and equity fund replacements plays out in unexpected ways.
Demand for alternative assets has risen significantly of late as investors seek substitutes for highly valued equities and bonds. This was underlined by statistics released last week revealing a record £5.1bn in absolute return fund sales in 2016.
Research by PwC has suggested global retail alternative assets could rise from $900bn (£720bn) in 2015 to $8.1trn by 2020, with Europe providing a key area for such growth.
Much of the recent growth has been driven by larger investors, with advisers thus far tending to concentrate on multi-asset absolute return funds. The market has been tipped to enter a new phase as intermediaries, feeling more at ease with the space, become more discerning in their choices.
James Beaumont, head of the portfolio research and consulting group at Natixis, which monitors a large number of adviser portfolios, said: “As people become more comfortable with investing in alternatives, they will become more specific about how they invest.
“Rather than having an alternatives bucket, they will have a long/short sector in equities, or a market neutral sector.
“They will be more definite about the alpha they want. They will move away from the big multi-asset funds and get more picky.”
The anticipation of such a move comes at a time when many are concerned about rich valuations in fixed income markets in particular.
In the past year fund buyers have been presented with a conundrum as they seek a substitute for the likes of gilts in a bid to protect against downside risk.
Jonathan Bell, chief investment officer at Stanhope Capital, noted that areas such as private credit were becoming more accessible via fund structures.
“Private credit didn’t exist before and now it is more available, which perhaps reflects the change in bond and equity markets, as well as dissatisfaction with [other diversifiers],” he said.
For DFMs already familiar with alternatives, the search is, in some quarters, moving in the opposite direction.
Some are turning to multi-asset funds as replacements for their bond fund exposure – despite these products often being targeted by advisers seeking a lower-cost alternative to DFM portfolios.
David Aird, UK managing director at Investec Asset Management, said he had been “surprised” by the interest from wealth managers in the firm’s Diversified Growth fund.
Mr Aird said the challenge for asset managers was to ensure their products’ attributes had been successfully communicated to clients.
But fund groups and advisers could both face difficulties in seeking to make a more concerted move towards alternatives, according to Mr Bell.
“The problem [in the retail space] is a regulatory problem,” he said.
“The regulator likes you to have bond and equity funds, and cash. [Using more alternatives often] can’t be done in the retail space, but it can be in the institutional space. It’s at the cost of diversification.”