Alternatives no longer luxury for diversification

Alternative assets are no longer a luxury option but a necessity for successful portfolio management, according to BlackRock. 

Global chief investment strategist at BlackRock, Russ Koesterich, told a media briefing yesterday sluggish growth, low interest rates, low inflation in developed countries, global political unrest and doubt in emerging markets will result in a “bumpy ride” for traditional asset classes of stocks and bonds, and correlation between them is high. 

“This is not the year to get hung up on tradition,” Koesterich said. 

“An across-the-board approach to alternatives is not going to work, nor the alternatives which have shown the strong returns over the past several years. Alternatives have often meant commodities, but in the current environment of low inflation and rising real rates, we would be cautious on taking any big bets in this asset class.   

“Instead, investors should consider other alternatives such as infrastructure - a good bond market substitute in a low-yield world.” 

The global economy is expected to grow slightly, accelerating to 3.5 per cent from 3 per cent in 2014. This should result in slightly higher interest rates, mostly through higher real rates.  

“As the Federal Reserve removes the extraordinary accommodation known as quantitative easing or tapering, our best guess is that 10-year U.S. Treasury yields will climb to around 3.25 per cent to 3.50 per cent by the end of 2014,” Koesterich said. 

Australian head of fixed income Steve Miller said the Australian investment market does not have much diversity in terms of what investors can access both in asset classes and within asset classes. 

“I think that’s where we as Australian investors perhaps need to expand our thoughts about the investment universe and perhaps even more aggressively look offshore,” he said.  

“Not that we haven’t done so in the past but given the size of our pension market, the lack of diversity and the relative smallness of the asset space, [look at] what that might mean for our investment behaviour.” 

Koesterich predicts interest rates will be on hold for 2014, or they will go lower rather than higher because of sub-trend growth. He said this is a “benign backdrop” in terms of monetary policy for Australian equities. 

Australian yields are relatively high, especially in the banking sector. 

“Equities are not nearly as cheap as they were 16 months ago, but still represent a better alternative than cash or bonds. That said, the United States is looking fully valued. While stocks can move higher, gains will need to come from earnings growth, rather than further multiple expansions,” Miller said.