Talking Point  

Alternative assets may not be good diversifiers in current market

Alternative assets may not be good diversifiers in current market

Most alternative assets are not really diversified and may not perform well in the present turbulent market conditions, according to David Jane, who jointly runs a range of multi-asset funds at Premier Miton.

Mr Jane said he has slightly increased his exposure to some alternative assets in recent weeks, but generally is wary of the asset class.

He said: “In all honesty I am never sure what people mean by alternatives. 

"Most things are either equity (ownership of a business), bonds (lending), property (land and buildings) or, I guess ,commodities. 

"Those purporting to be alternative are generally are a form of one of the above often mixed together with leverage and marketed as something different and uncorrelated. 

"Often they come with a high degree of illiquidity thrown in but marketed as a benefit (low volatility).”

He said infrastructure is an area that interests him right now as those assets tend to perform well when interest rates are low, but his preference is to invest in the underlying infrastructure companies, rather than buy funds that invest in those companies.

He said the second type of alternative asset that is relatively popular is hedge funds.

These are instruments that can invest in a wide variety of assets, including currencies, and in many cases invest based on an assessment of wider economic conditions.

Mr Jane said such funds are uncorellated to other asset classes and so are genuinely “alternative”, but he is not keen to invest in such strategies. 

He said: “These are basically traditional assets in a long short package marketed as something different with high fees. 

"The return is either beta, or where market neutral, the skill of the underlying manager.

"Either way doesn’t look very different to buying the underlying assets without the leverage.  When things go wrong they often go very wrong because of the leverage. Not for us.”

Simon Edelsten, who runs the £267m Mid Wynd investment trust said: "In theory, low interest rates suggests the returns from real assets are worth more, but in practice many of these returns look vulnerable to the economic issues we face.

"It is easier to identify sector whose ‘real assets’ are less required: less use for planes and offices spring to mind. 

"The current economic slowdown has also dramatically damaged demand for oil, and electricity demand is also falling.  When an economic recovery comes, electricity demand should rise with that, but we may retain habits of driving and flying less.

"Generally I think the current crisis is very bad for some sectors such as aero, auto and financials, and slightly good for technology and healthcare which are not sectors particular supported by real assets."