Industry Voice: Alternatives

Lawrence Gosling

Lawrence Gosling (LG): What do alternative investments do for investors in multi-asset funds?

Caspar Rock (CR): We're looking for assets that have a lower correlation to equities, or lower correlation to bonds, and preferably both. We think of these as alternative assets.

So you could think of a motorway, or a doctor's surgery, or an Airbus. They don't trade every day. And so they are necessarily less liquid in how frequently they are valued, bought, and sold.

When you're buying an alternative asset you're talking really about having an asset where the underlying drivers of return are different from equities and bonds. That's what you really want.

Caspar Rock

We really concentrate on having an attractive sustainable and hopefully growing level of yield from our investments. What we're looking to do is to be paid to be patient, because if I can pay you 3, 4, or 5% per annum and grow it in line with inflation, that's a very attractive alternative asset to own. And if you're receiving that level of yield, what it means is you can be less concerned about day-to-day fluctuations in valuation.

We've used them across all our multi asset portfolios for a number of years. We think they really add value in as much as they can improve the yield of a portfolio, as well as reduce the volatility. What we're doing in our usage of these is almost democratising the use of alternatives.

These kinds of investments always used to be owned by the big private banks for private individuals who had a large amount of money to invest. And what we're trying to do is to allow ordinary investors to access these assets in a diversified format.

We've got things like infrastructure projects, renewable energy projects, doctors' surgeries, and student property. Each of these individual asset classes generates revenue through very different means. We've created portfolios with a broad spread of these investments, and each of these have an element of income generation.

These investments have an element of inflation protection in their revenues, and often these are contracted inflation uplifts. So these will either be backed by rental agreements, or contracts with the Local Authority, or governments backing an infrastructure project.

LG: So what do we worry about?

CR: Two things. First is the level of correlation to either equities or bonds, or both, of the alternative assets. And second when looking at the individual alternative assets we hold do they have a low correlation between each of them? So we're aiming to end up with two levels of diversification rather than just one.

So what makes us different? Firstly, we have the capacity to consider the whole, and select the best of breed managers for every single asset class that we invest in. Some multi asset income strategies automatically invest everything or a significant proportion in-house.

Secondly, we have extensive experience of choosing and managing alternative assets having held significant weightings to these assets across our range of funds. Finally, we have a robust investment and fund selection process that should give you confidence in the funds we select.

Keep an eye out for a three-part video series released this week, in which Lawrence Gosling discusses the benefits of using Alternatives in client portfolios with Caspar Rock