In a world of emergency interest rate rises and strongly performing risk assets, we believe it’s important to stay truly diversified and continue to think long-term. In this, the first in a series of 5 articles exploring our new Diversified Alternatives asset class, Simon Molica explains the thinking behind its introduction.
A Property rebuild
Investing in alternative assets alongside traditional ones like cash, bonds and equities, should benefit long-term risk adjusted returns. Historically, the alternatives allocation for Parmenion’s investment solutions has been represented by Property. We firmly believe in its diversification benefits owing to the uncorrelated nature of physical real estate, but given the growing liquidity risk (increased frequency of fund suspensions) and regulatory risk (strong likelihood of notice periods being introduced), we’re expanding Property into the broader ranging asset class of Diversified Alternatives and incorporating asset classes with other characteristics.
This move is part of our annual Strategic Asset Allocation (SAA) review, which ensures the decisions we make are relevant each year, and representative of the future investment landscape.
Property conversion
After extensive research and risk modelling, our goal to mimic (not replicate) the risk and return profile typically delivered by Property resulted in a reduced Property allocation, combined with infrastructure, absolute return, and short dated bonds.
The name ‘alternatives’ is usually associated with complexity, illiquidity and risky strategies, but we favour a ‘keep it simple’ approach. Rather than out and out return enhancing, we view our alternative exposure as risk reducing too, with portfolios benefitting from uncorrelated return profiles – leading to a smoother client journey over time.
Extending the asset class
The underlying assets within Diversified Alternatives are blended in equal 25% portions to represent our strategic positioning. This can be flexed depending on mandate.
- Property still incorporates directly held UK commercial properties, and value is traditionally reflected through the income orientation of the underlying properties.
- Infrastructure exposure is gained through a fund of investment trusts, giving the best direct exposure to infrastructure and infrastructure related projects.
- Absolute Return describes funds seeking to deliver positive returns regardless of market conditions. Our fund choice achieves this by taking both long and short positions.
- Short-dated bonds are bonds close to maturity and therefore less risky, as the likelihood of default is less than their longer dated counterparts.
These four asset classes work well together because they’re not reliant on the same economic drivers and market conditions to perform.
Keeping our house in order
The table below illustrates the uncorrelated nature of these four asset classes. This is measured on our 20-year risk framework and each asset class has been assigned a proxy index.
Evolving asset classes within the risk framework means we can make sure that portfolios remain relevant and on the front foot. We generally expect minimal annual changes to our SAA. However, when we see an opportunity to alter exposures in support of better future client outcomes, we will do so. Diversified Alternatives exposures may evolve over time as exciting new opportunities arise. Watch this space.
Look out for our next article in the Diversified Alternatives series where Meera Hearnden explains more about infrastructure.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.