In order to generate income and returns, investors will need to construct their portfolios less in the traditional way and focus more fast-growing sectors, such as energy transition and healthcare innovation and invest in private markets, according to Schroders.
Across the multi-asset strategy, investors added some innovation to their portfolios, with a larger focus on private assets and credit markets, searching for ‘pockets of value’ while utilising the breadth of asset classes such as fixed income.
“For instance, fixed income as an asset class is incredibly broad, from sovereign bonds through to credit, investment grade credit through to lower quality companies, through into private markets, through into different forms of commercial lending,” Simon Doyle, head of fixed income & multi-asset Australia, Schroders, said during the firm’s investment conference.
“None of these by themselves is the solution but looking at a number of them as part of a solution for portfolios can be quite powerful in generating returns and income.”
According to Julie Koo, managing director, head of Citi Investment Management sales, Asia Pacific, one such market was China about which investors looking for other sources of income, including equity dividends and alternatives, should think about.
China is currently the country with a US$15 trillion bond market and second largest in the world, accounting for 50% of bonds globally that are yielding more than 2.5%, and with the opening of the Bond Connect programme and the inclusion of China bonds into some of the global indices in recent years, there were more international investors finding their way to that market, Koo said.
Mike Nikou, global partner, Antler, added that investors were allocating a larger portion of their portfolio to non-traditional asset classes and would continue doing so in the foreseeable future.
“What is interesting is that 20 years ago, there were 7,000 listed companies in the US and that number now is less than 4,500. That’s almost a 40% reduction of listed companies. So if investors want to get access to a certain sector or a certain type of company, they will most likely need to allocate to private assets,” he said.
““However, I do think it is important for investors to conduct due diligence and screening before taking a decision on private assets, because, for instance, the dispersion of returns between the first quartile and fourth quartile can be huge. Selecting the right fund managers to manage this part of the asset class can help investors achieve the illiquidity premium on private market investments.”
According to Doyle, despite the opportunities private markets offered, investors should reconsider their own tolerance for illiquidity as there was ‘a cost to every benefit’ and their portfolios should be well-diversified with a well thought exposure to private markets.
As far as key thematics were concerned, Koo said one of the key trends was around digitisation and would drive the next leg of growth for technology. She said she believed that with the roll out of 5G there would inevitably more needs regarding housing and storing the data.
“Another theme is energy transition, and we expect more private companies will be looking at ways that they can transform their own businesses to contribute to government’s net zero targets,” she said.
At the same time, Nikou noted that it was a good time for investors to allocate portions of their portfolio to venture capital.
“Some of today’s tech startups could be global giants of tomorrow. By investing in venture funds, investors can get access to private companies that are in early growth stage where valuations are low, as well as access to some of the pre-IPO growth stories.
“From a portfolio construction perspective, venture capital is a good diversifier as it has a relatively low correlation to public markets,” he said.
