Stephanie Carbonneil, senior investment manager at Architas, highlights the many reasons why investors should be paying more attention to the esoteric areas of the investment universe.
As developed economies continue on their long and arduous road to recovery, markets across the globe are particularly volatile.
Against this backdrop of low economic growth and market stress, the correlations between various asset classes have been rising.
For example, since the beginning of the year, we have seen simultaneous falls in equities and fixed income, which typically exhibit low – or even negative – correlation.
Wake up and smell the esoteric investment opportunities
At times like these, building and maintaining a diversified portfolio can prove challenging.
During this period, however, we have seen encouraging returns from alternative holdings. The alternatives sphere of the IMA sectors is a relatively unknown universe, typically used as a ‘catch-all’ category for all assets that do not fit into the standard equities, bonds and property classifications.
However, last year, we undertook some research into the sector which has helped us uncover some exciting opportunities.
We began by identifying all the holdings in the IMA’s Mixed Investment 0-35% Shares, Mixed Investment 20-60% Shares, Mixed Investment 40-85% Shares and Flexible Investment sectors (a total of 52,649 holdings).
Examining these, we discovered that roughly two-thirds by value were collectives or exchange traded funds (ETFs), with the remaining third being direct equity, bonds, cash, derivatives and property.
Of the collectives, just over 19% were categorised as ‘alternative’. This translated to roughly 12% of the total composition of the four sectors – a considerable allocation.
The largest class within the alternative assets was hedge funds (19.7%), closely followed by absolute return (17.3%), property (14.4%), private equity (8.1%), commodities (8% in energy, 7.7% in metals, 4.7% in general commodities and 1.8% in soft commodities), structured products (5.4%), infrastructure (4.8%), convertibles (1.7%) and, lastly, derivatives (just 0.4%).
What began to emerge was the sheer range of investments available within the alternatives sphere.
Crucially, these investments are typically far removed from traditional equity and fixed income assets and, therefore, exhibit low (or even negative) correlation with them.
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