Considering alternatives

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The search for reasonably priced equity and decent fixed income yields is taking investors towards alternatives.

Investors gated by hedge funds during the global financial crisis of the noughties may scoff at the idea of alternative investments becoming more attractive relative to traditional assets.

However, for those struggling with record low interest rates and yet more quantitative easing – which in Europe threatens to significantly skew demand versus supply of risk free assets in secondary markets – the benefits are becoming increasingly attractive.

German 10 year Bunds traded at a yield of 0.28% around the middle of March, while the US 10 year Treasury at 2.1% was well below a historical median estimated at 3.9%, according to one data set.

Regarding equities, the S&P 500 P/E ratio was around 20x in mid March, or some 13% higher than the multiple reported a year earlier. In Europe certain estimates put the Cac 40 average close to 23x, and the Dax around 22x – even as these indices have traded close to 52 week highs.

Meanwhile, evidence is mounting that more investors are seeking out alternatives. The Alternative Investment Management Association (Aima) said in a recent report – KPMG/AIMA/MFA Global Hedge Fund Survey – Growing Up – A New Environment for Hedge Funds – March 2015 – that “More than half (54%) of all fund managers with AUMs of between $500m (€467.6m) and $1bn (€935m) said that they expect corporate pension funds to be their primary source of capital by 2020 – versus just 23% of their larger competitors.


Elsewhere, the European Public Real Estate Association data points to the attraction of property. It notes the FTSE EPRA/NAREIT Developed (Global) index figures published for the end of February this year suggesting that on a global basis returns over one year were 43.4%, compared to 15.3% from global equities, and 7.7% from global bonds.

The index counts 311 constituents, representing a free float market capitalisation of more than €1.16trn. From a policy perspective, alternatives are also gaining credence.

For example, the European Private Equity & Venture Capital Association (EVCA), responded to the European Commission Green Paper, Building a Capital Markets Union, by noting that “between 2007 and 2013, our industry invested more than €307bn in 25,000 companies, employing more than 8 million people in the EU.”

“To unlock more of this essential financing, the EU should aim to free up the enormous pool of capital sitting with institutional investors, enabling it to flow across borders to companies that desperately need it. With this critical initiative to enhance the single market, the Commission is taking a key step to growth,” said Dörte Höppner, EVCA chief executive.

The EVCA itself estimates that there is some €12trn in relevant institutional investor capital across Europe. Individual investors themselves will continue to push the trend towards alternatives also. Norges Bank Investment Management, which manages Norway’s Government Pension Fund Global, Europe’s biggest investor, had 2.2% of its portfolio in property as of the end of December 2014. Its target is a 5% exposure.

For those running multi-asset funds the attraction of alternatives in context of the above is, then, well founded. Noel O’Halloran, director-chief investment officer at Kleinwort Benson Investors in Dublin says that alternative investments will feature increasingly through 2015 in his firm’s asset class exposure.

“With fixed income and cash investments increasingly almost yielding zero – and negative in many instances – and equities at all time highs, I believe alternative investments are well positioned to provide competitive returns and particularly in a diversified multi asset fund.”

Hedge funds, commodities, property and currency are all worth considering, O’Halloran says.

“I believe they will provide a competitive return versus other asset alternatives. In particular I like hedge funds and currencies. As the year progresses and later in the year as I look into 2016, I believe commodities can make a performance comeback. In general, as we are living and investing in a volatile and uncertain world I prefer liquid investments that trade daily, so would remain shy about investing in illiquid alternative assets.

“Property has historically been in this bracket.”

The view is echoed in Italy. Fabio Bariletti, general director at Kairos in Milan says: “In a context where two thirds of European bonds trade at negative yields, alternative asset classes can contribute significantly in terms of returns as well as portfolio diversification. For this reason, we are already considerably invested in the asset class.”

“We prefer equity long/short funds and multi asset funds with focus on debt instruments offering positive real returns. As a matter of fact we have recently launched a fund that pursues this strategy.”

Also in Milan, David Karni head of fund selection and advisory at BCC Risparmio e Previdenza, expects to increase exposure to alternatives through the year.

“We are keen on hedge funds strategies as well as commodities.”

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