Asset classes of the future: what investors should choose

Ongoing economic uncertainty means that few managers and investors can
comfortably predict which asset classes will perform well, according to a panel of experts.

When it comes to investing, since the financial crisis the rules of the game have been changed. Equities, bonds, be they corporate or sovereign, cash, property – all once widely favoured means of generating a return – are failing to convince investors that they are secure and guaranteed to perform.

Amid diverging opinion as to who and what can deliver future performance, within an ongoing volatile global market, some managers are arguing that conventional asset classes are no longer fashionable.

Jon Macintosh, partner at absolute return manager Saltus Partners, says: “Conventional assets who have been your friends for the past ten years will prove not to be your friends.”

Both he and Jon Moulton, the founder of UK-based Better Capital, argue the riskiest investment that can be held now are long-dated gilts, once seen as relatively safe assets. Why? Because the UK is at a real risk of default as the third-largest debtor in Europe, says Moulton. “The outlook for government bonds and equities has not got any better,” says Macintosh, which is why he backs investing in alternatives.

Many managers agree the returns of the future lie in that asset class, rather than ‘plain vanilla’ solutions. Matthew Arkinstall, investment director at Greenpark Capital, thinks ‘alternative alternatives’ are the way forward.

Moulton, both a venture capitalist and a vocal critic of regulatory responses to the crisis, also backs alternatives in spite of his gloomy prediction that the worst is yet to come. “The alternatives industry is on its way uphill, not downhill, driven by lower interest rates, higher inflation and better returns,” he says.

At a conference hosted by Guernsey Finance, investment managers were asked where they thought future returns lie. Their top tip turned out to be private equity.

Stephen Foster, COO of fund of and single manager hedge funds at Credit Suisse, thinks private equity is “an interesting place to be”. Charles Murphy, head of investment funds research at Matrix Asset Management, believes the asset class will offer the highest returns through leveraged buyouts.

One of the benefits of private equity is that it gives back a level of control to investors that they lost during the crisis. In exchange for backing a firm financially, the investor gains control over the management of that company, being able to choose who sits on its executive board.

“Private equity at its best is a platform for doing things that cannot be done in a public markets context,” says Arkinstall. It achieves this by offering liquidity and risk control, he adds.

Moulton is somewhat sceptical. “Private equity working on companies is a good thing, but that is not an enormous part of the business, it is about a third to a half,” he says. He adds that firms can be equally well treated in public markets, or owned by private individuals to the same effect.

It is also expensive, both Arkinstall and Moulton say.

Arkinstall, who selects private equity managers for Greenpark Capital, says this is an interesting task because “you get to meet some of the most talented investors in the world – and some of the worst”. Since merger and acquisition skills are also needed, going beyond the requirements of a conventional fund manager, private equity is costly, he explains. As an investor, you also have to be willing to endure the ‘J’ curve, he adds.

Moulton questions whether private equity can really deliver the returns it purports to. “Possibly, possibly not: it is expensive. It also has different attributes in high and low growth economies,” he says.

For Moulton, it is more a matter of geography than of asset classes. As he puts it: “You are more likely to make money out of a fast-growing economy than a low-growth one.” Essentially, whether an asset class can generate future returns depends on where it is invested.

That question of geography, with emerging markets set to outperform developed ones in future, also offers investors the opportunity to capitalise on likely further distress in the West, thinks Macintosh. “Too much debt is like having an alcohol problem. Debt as an asset class is like having a Betty Ford clinic. Nobody wants to go in there, but you know it’s good for you,” he says.

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