Income focused equity funds and other styles of alternative investments can adapt to changing market conditions using tools such as shorting, derivatives and cash allocation within portfolios, according to Standard & Poor’s Fund Services in its alternative strategies review.
S&P analyst Michael Armitage said that managers who were able to limit capital loss during the global financial crisis and participate in the recovery showed the value of variable beta.
“We generally hold a higher conviction in managers who have the ability to use the full range of their investment mandates,” he said.
A focus of the review has been the operational risks posed by funds’ prime brokerage credit facilities, which facilitate single-name shorting and leveraging of funds, the review stated.
While most managers in the review were aware of the risks in prime brokerage and asset-custody structures, only a few took action to address them and provide better asset protection.
The CFS Equity Income fund was the only fund in the review to receive a five-star rating. The Zurich Investments Equity Income Fund was downgraded from five to four stars and the Merlon Australian Share Income Fund was taken off hold and awarded a three-star rating.
Income focused funds within the review aimed to provide enhanced yield and mostly incorporated option covered sales, and this subsector remains the most competitive in terms of the skills set within the investment teams, Armitage said.
Absolute return funds focused on a particular sector such as technology or resources and sought value through varying equity market and/or sector exposures, often with a focus on downside protection.
“Offering such a product is therefore a natural outgrowth of a manager’s high conviction, not only in its particular sector-specialist capability but also in its ability to prudently vary market exposure through the cycle,” Armitage said.
Equity-beta funds are characterised by the manager’s ability to “sell short” single-name stocks and indices or use derivatives to reduce the fund’s overall exposure, the review stated.
