2018 was a difficult year for investors in many alternative strategies.
The promise of uncorrelated investment returns is an appealing prospect, as evidenced by the growth in both the number of absolute return funds, and overall assets under management (AUM) in the sector.
Returns, however, have in aggregate, been disappointing and many investors and advisers are questioning their allocation to alternative strategies.
Case for alternatives
However, in our view, the case for an allocation to alternatives is still clear.
Global government bond yields remain low by historical standards and over $17tr of global debt trades at negative yields.
At such low yields, prospects for a continuation of the 38-year bond bull market appear slim.
BlackRock estimates the 10-year nominal return for UK Gilts to be 0.7 per cent pa, which falls to -1.3 per cent pa, adjusted for 2 per cent inflation pa, with an expected volatility of 6.8 per cent pa - hardly an attractive investment proposition.
In conjunction with poor future returns, our analysis indicates a reduction in diversification benefits due to an increasingly unstable relationship between government bonds and equity markets.
Given this poor outlook for a core element of investor portfolios, it is understandable that alternatives have witnessed ongoing investor interest.
Our approach at Waverton is to clearly separate the alternative universe between absolute return and real assets.
The former should seek to deliver positive returns on a 12 month rolling basis, display low volatility and importantly low correlation to the broad equity market.
By comparison, real assets should be considered long only, return seeking investment opportunities, delivering equity like returns with lower volatility, albeit with some correlation to risk assets.
Value in real assets
We have categorised the universe across five real asset classes; property, infrastructure, commodity, asset finance and specialist lending and we are particularly positive on the current opportunities across a number of the specific real asset sub sectors.
Our contention is that an allocation to real assets can help investors meet the challenge of the low interest rate environment and bring portfolio diversification benefits.
We believe that real assets deserve to be considered as a core allocation within investment portfolios over the long term.
The asset class has proven its value over time by providing reliable long-term total returns, inflation protection and the ability to offset the volatility of equity and fixed-income investments.
Investors are looking for what real assets offer: the potential for steady, predictable and growing income, potential gains and capital preservation in an uncertain global environment.
The Waverton Real Assets Fund seeks to achieve a UK CPI+4 per cent total return over the long term.
Many of the assets and cash flow streams accessed are either explicitly or implicitly linked to inflation.
Low interest environment
Should the global economy remain within a “lower for longer” inflation and interest rate environment, and as real assets themselves become increasingly well understood, there is room for yield compression in many of the underlying investments.