Spanish alternatives

Yields on government bonds have been low for a while, but now even a traditionally fixed income oriented market like Spain has started to look elsewhere for returns.

After a couple of years of speculation on a possible “great rotation” from bonds to equities and what seemed to be just a mild re-adjustment of portfolios, a number of Spanish selectors from Madrid and Barcelona told InvestmentEurope that they have concretely started decreasing their position in fixed income in favour of what it is generally referred to as “alternative investments”.

However, rather than thinking hedge funds, it is more an alternative to fixed income and sometimes within fixed income that these selectors tend to refer to.

Félix Lopez, partner and head of Fund Selection at atl Capital, says that fixed income has been quite of a changing area lately. “We have been trying to adjust to the low yield environment by selecting flexible funds and doing tactical allocation by choosing three or four uncorrelated managers to try and manage volatility,” he says.

With 98% of its client basis coming from the private side and a couple of large institutional mandates, atl Capital tends to keep positions for the long run, but it lately had to rebalance its average portfolio weighting by reducing investments in fixed income from an average of 30-40% to 20-25%.

“On the equity side, we are long on Europe and Japan, short on US and neutral on emerging markets,” he adds. However, Lopez also says that the company gets equity exposure through global funds and only in the last couple of years they have gone back to looking at alternatives, mainly focussing on long/short equity.

While he acknowledges that many managers are still looking for an alternative to fixed income rather than to alternatives altogether, Lopez fears great disappointment ahead for private investors who, in his opinion, might even risk facing actual capital loss.

“Convincing investors to take on more risk is definitely going to be the key challenge for asset managers in coming years,” he says.

From Barcelona and from the slightly different of a pure family office, Yoel Rosenheck Berlin, partner and analyst at Troy Consultores Asociados, says that, although his conservative clients’ exposure to equities is not generally higher than 30%, they have been going out of fixed income gradually.

“To compensate, we are looking at treasury funds and some alternative funds in order to try and secure higher returns with little volatility and risk,” he says. Rosenheck adds that he is looking at alternative funds with volatility below 5% in the short and medium term and adds that currently some 25% of its average portfolio is invested in alternatives.

The pressure of switching from fixed income to other asset classes and strategy is also felt at fund platform Tressis, where fund analyst Pablo Nortes says they have been switching from fixed income to some alternative products, reaching 25% exposure, all of them long/short equity, within their conservative portfolio.

“However, we are not going to increase that bucket. The rest is invested in mixed asset funds, convertibles and some equity and tactically a bit of cash, as well as short term fixed income and one strategic fund which has the ability to go short in US rates.”

Nortes says they are doing something similar in balanced portfolios, where they use less alternative products in favour of equity.

“We have 80% in equity, 10% mixed asset funds and 10% in fixed income in aggressive portfolios,” he concludes.

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