2018 is shaping up to be a tougher year for portfolios compared to 2017. Albeit the year has started well.

Longer term we appear to be entering a low return environment. This creates some challenges for the industry and investment portfolios.

This article articulates these challenges well and expands the discussion into the potential role Alternative Investment Strategies could play in an investment portfolio.

Amongst the good points the article makes, a couple stand out for me:

• Focus on the risks in the portfolio (which is not necessarily the categories of the assets)
• We are at the mercy of what markets deliver in terms of return; that cannot be controlled. BUT, risk can and must be managed to the level consistent with the investment goals.

 

With regards to Alternative Investment Strategies, as the article says, they must receive serious considerations.

Alternative strategies sometimes offer the way to gain true portfolio diversification and reduce the dominance of listed equity investments within a portfolio.

I mean “true portfolio diversification”. This is harder to attain than is often claimed. For example the addition of listed property and listed infrastructure into a multi-asset class portfolio offers limited diversification benefits. They are after all sectors of the broader listed equity market, which the multi-asset class portfolio will likely have exposure to. These equity sectors will largely behave like the rest of the broader equity allocation, particularly at times of financial market stress. Thereby offering no true diversification benefit. They may diversify your “equity” exposure, but provide limited diversification to a multi-asset portfolio. Listed Property and listed Alternatives are not alternative investments or strategies, they are equities.

I have witnessed in the last year Portfolio’s “diversified” out of the broader equity market and into list property and infrastructure as a means to enhance portfolio yield and diversify the portfolio. Never chase yield. The performance difference between the broader equity market and listed property and infrastructure is 10-12% over the last 12 months. Thereby a very costly result in an effort to “diversify” the portfolio. The diversification benefits of which will also disappoint over time.

These actions reflect a poor approach to portfolio construction and portfolio risk management, particularly relative to a set of future liabilities and investment goals.

 

 

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