A trio of fund managers has recommended that investors look to alternatives and eschew mainstream asset classes and investments to offset recent market volatility pointing to non-standard investment processes as a way to boost returns.
Man AHL, chief executive, Sandy Rattray said the slow recovery of stock markets since the global financial crisis in 2007 has driven interest in alternate sources of returns, particularly during downturns with the focus shifting to alternative investments and new investment models.
He said while Man AHL specialised in quantitative investment management the group saw diversification as an important factor that needs to be reinforced for people concerned about increased volatility.
“The recent market downturn has been a reminder to investors of a lesson that we learnt all too well during the global financial crisis; to protect investments during downturns, investors need to consider more than just a portfolio consisting of equities and bonds.”
“Alternatives can often deliver low correlation with traditional assets, potentially providing diversification benefits and improved portfolio efficiency. And trend following strategies in particular have the capability to benefit from falling prices, which can help defend investment portfolios during market disruptions.”
Investors Mutual Limited, Senior Portfolio Manager, Simon Conn said investors who were looking to diversify towards small caps needed to be cautious about fads and trends in that sector and look beyond growth and consider the sectors diversification benefits.
Conn said small caps were often looked at as the “land of great hope” with the index reflecting the trends of the day, but warned these fade away and do not deliver sustainable returns over time.
“Ultimately, investors need to rethink the way they approach small caps. The chase for capital growth has made small cap investing a short-term play for the majority which, evidence suggests, is an unsuccessful strategy.”
“By investing in small caps on a long-term basis with a focus on quality companies that provide portfolio diversification, both the income and capital growth returns for investors are broadened. This is particularly important given the concentrated nature of the Australian market index, exacerbated by the subdued economic environment,” he said.
This concentration has caught some managers ‘asleep at the wheel’ according to Van Eck Global Australia, Director — Investments and Portfolio Strategy, Russel Chesler who stated that the shift to large cap dividend yielding companies has skewed the concentration risk in Australia’s share market and hit returns during the volatility of August.
Chesler said the banks all suffered more than 10 per cent declines and portfolios with high concentrations of these stocks would have “experienced a disappointing month due to the concentration risk these shares have on the Australian market”.
Chesler said an alternate approach, which adopted an equal weight investment strategy, would continue to offer better outcomes across a range of markets and pointed to ongoing volatility as a driver to consider such a strategy.
“With the looming Fed decision on US rates, China’s slowing economy creating global jitters and Australia’s own uncertain economic picture, volatility on the ASX looks likely to remain for the near future and investors could take some risk off the table and improve their returns by adopting an equal weight investment strategy,” Chesler said.
