In association with
Jaime Arguello CIO, Architas
he popularity of alternative investments has grown substantially over the years since the financial crisis. The record-breaking volatility equities experienced in the late 00’s saw investors searching for opportunities outside the mainstream. This spurred the expansion of the alternatives sector, with a lot of new products launched promising investors a slice of something different to traditional asset classes. With markets now later in the cycle, interest rates perhaps finally on the road to normalising and the bull market of the last decade stuttering, alternatives are in the limelight more than ever. The alternative investment universe contains a huge range of investment options, from asset leasing to infrastructure projects and everything in-between. Researching and valuing some of the more esoteric sub-asset classes can be difficult. Given the wide variety of options available, which have the potential to be true diversifiers for investors? With so many unique characteristics to the different investments, it takes specialist research in order to find the best opportunities the market has to offer. We hope you find this guide useful in understanding the opportunities as well as the challenges involved in selecting alternative assets for your clients’ portfolios.
In a world of lower growth, a good deal of uncertainty and the feeling that traditional investment options are under delivering, alternative investments may just be the answer
Seeking an
alternative
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Welcome
Seeking an alternative
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Contents
Hover and click for each chapter
The rise of alternative investments
weighing up the options
Why are investors turning to alternative assets?
Architas’ spring roadshow: Meeting advisers
Looking under the bonnet
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The Architas funds featured can invest entirely in units of collective investment schemes. The value of the funds and the income from them can fall as well as rise purely as a result of exchange rate fluctuations. Clients can invest in the funds through a number of financial products. These funds may not be appropriate for investors who plan to withdraw their money within five years. Past performance is not a guide to future performance. The value of your client’s investment and the income derived from them can go down as well as up and they may not get back what they originally invested. For the Architas Diversified Real Assets Fund, some of the portfolio is invested in non-mainstream assets, which during periods of stressed market conditions may be difficult to sell at a fair price, which may in turn cause prices to fluctuate more sharply than usual. If you require further information on any of our funds, the Key Investor Information document (KIID) and the prospectus are both available free of charge on request from Architas Multi- Manager Limited. The KIID is designed to help investors make an informed decision before investing. You can view or download all our funds’ KIIDs via our website at architas.com on the home page and the literature library. AXA is a worldwide leader in financial protection and wealth management. Architas operates three legal entities in the UK; Architas Multi-Manager Limited (AMML), Architas Advisory Services Limited (AASL) and Architas Limited. Both AMML and AASL are owned by Architas Limited, which is a 100% owned subsidiary of AXA SA (a company registered in France). AMML is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML in the UK works with strategic partners and AXA Group internal fund managers, to find out more information about this please visit architas.com/inhousestratpartners/. AMML is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm reference Number 477328). It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD.
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nce seen as a niche market, alternative investments have become increasingly popular in recent years. In 2016, 344 new alternative funds were launched, compared to 10 in 1997. And further growth is on the horizon: a 2018 report by data tracker Prequin, The Future of Alternatives, predicts that the alternative investment industry will reach AUM of $14 trillion by 2023 – up from $8.8 trillion at the end of 2017. Much of this has been driven by the quest for diversification in an evolving market environment. Equities and bonds are often characterised by an inverse relationship – meaning that when equity prices rise, bonds fall. However, this relationship can sometimes reverse, while factors such as regulatory changes and the impact of monetary policy have led to higher risks for both asset classes. This has the effect of increasing the appeal of alternatives, which typically have low correlation to traditional asset classes – and to different assets that fall under the ‘alternatives’ umbrella. At the same time, factors such as lower forward-looking return expectations and concerns about the prospect of a recession are contributing to interest in this sector. All of this means that alternatives have a role to play in most investment portfolios. Indeed, the Prequin report notes that 80% of institutional investors have an allocation to at least one alternative asset class, while over half have allocations to three or more.
With the size of the alternative investments sector predicted to reach $14 trillion by 2023, which asset classes and strategies fall under the heading of alternatives, what benefits can alternatives offer in the current market – and what do investors need to be aware of?
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As well as investments in assets such as real estate and infrastructure, Louis Tambe, Fund Analyst at FE, points out that alternative investments can also include hedged exposures in traditional assets where the alternative return stream comes from difference in trading strategies. “Essentially any asset whose return drivers differ from equity or fixed income exposure can be considered alternative,” he says. Matias Möttölä, Associate Director, Multi-Asset and Alternatives at Morningstar, says that while alternatives can be defined according to the type of assets they invest in, such as real estate, timber or commodities, “this is not the definition we use in our products.” Instead, he says that Morningstar’s alternative categories consist of funds that use alternative or ‘hedge fund type’ strategies in managing money. “These funds typically go both long and short individual investments and even the market,” he says. “They belong to categories such as long-short equity, market neutral equity or systematic futures, to name a few.” He adds that the largest group of alternative investments are so-called multi-strategy funds, “which use several different types of strategies and typically want to reach an absolute return target, rather than trying to beat a market benchmark such as the FTSE stock index.”
Alternative strategies
While ‘alternatives’ covers a diverse range of assets, they may have certain characteristics in common. A 2018 paper published by CAIA Association and the CFA Institute Research Foundation, Alternative Investments: A Primer for Investment Professionals, outlines three primary attributes of alternatives, any of which can lead an asset to be classified as ‘alternative’:
Characteristics of alternatives
Alternatives offer a number of benefits that may be attractive to investors in the current market. For one thing, the relatively low correlation to fixed income and equities means that this sector can bring diversification benefits. The asset class can also provide some degree of inflation protection if returns rise in line with inflation – as is the case for some infrastructure assets. Returns can be attractive, and alternatives can play a part in managing volatility within the portfolio. “Diversification is the key reason you’d add alternatives,” comments Yearsley. “It could be risk reduction, but it could be to increase risk – risk is determined by what you're intending to invest in. It could also be to increase returns through an investment into higher risk asset classes such as private equity.” Tambe agrees that diversification is the overarching goal of incorporating alternative investments into a portfolio. This means “adding in different return drivers that you hope will be less correlated to equities and bonds so that risk is reduced without sacrificing long-term return” – a goal that Tambe says is the ‘holy grail’ for multi-asset managers. Morningstar’s Möttölä says that while alternative funds can play a role as a return enhancer, “in the European market it’s fairly rare to see funds which use aggressive strategies to reach double-digit returns year-over-year. Rather, alternative funds can provide a reasonable level of return while having moderate or little correlation with equity and bond markets.”
1. Returns are driven by exposures to underlying assets with non-traditional cash flows – “that is, cash flows that are not highly correlated with those that underlie traditional stocks and bonds.”
The report notes that in all of these cases, specialised methods of analysis are needed as returns do not mimic the returns of traditional asset classes – i.e. stocks and bonds.
Why use alternatives?
2. The returns of the investment are driven by complex trading strategies which result in “unusual risk exposures”.
3. Returns are structured to “generate non-traditional payouts”.
Beyond the primary goals of diversification and reasonable return, Tambe says that other secondary goals also have a role to play when selecting individual alternative assets. These can include considerations such as whether assets are performance enhancing – “e.g. they take away some portfolio volatility because of the lack of correlation but still take significant risk to achieve high returns”. Or risk reduction can be achieved by including very defensive assets, often negatively correlated to traditional assets, so that capital is preserved in “bad markets”. Tambe adds, “The second goal is extremely important and often overlooked by many investors who can forget that in times of high market stress most previously uncorrelated assets can all fall together, but negatively correlated assets can hold up.”
Secondary goals
Absolute return funds – which often set out to deliver positive returns in all market conditions – are included under the heading of alternatives (and may invest in alternative assets themselves). However, returns are not guaranteed and the sector often attracts controversy. In light of concerns about performance and complexity, how much appeal does the absolute return sector hold in the current market? Tambe says this is a sector that can provide useful exposures, “whatever your views on markets”, noting that with heightened volatility and larger spreads between the most expensive and cheapest stocks, “if momentum doesn’t break out either upwards or downwards then there could be more room for fundamental equity long/short managers to separate the winners from the losers.” However, he warns that there is also more risk of getting this wrong, “so manager selection is important.” Tambe says that another potentially interesting area is that of defined return investments – in other words, assets which are typically held to maturity to lock in a yield. If markets were to start trending downwards, and if a crisis were to be on the horizon, “then allocating to more defensive assets is wiser” – an outcome which he says could benefit equity market-neutral or global macro managers, as well as absolute return fixed income managers playing on longer duration and widening credit spreads. However, some are cautious when it comes to the overall benefits of the absolute return sector in the current market. Shore Financial Planning’s Yearsley says the simple answer is, “No, I wouldn’t buy most funds as they have failed to deliver on the crucial aspect – namely delivering an absolute return in most market environments.” Similar concerns have been expressed about alternatives as a whole. “The returns of alternative funds have not lived up to expectations,” comments Möttölä. “Many investors have bought them often to replace fixed-income investments, which yield very little, but the expected returns of alternatives have not materialised in many cases.” He notes that such funds do provide diversification benefits, and that a reasonably priced alternative fund with a strong manager and proven process can be a good fit to a portfolio – “but it’s important to understand the manager’s strategy to understand what you can realistically expect from the fund.”
Absolute return?
It is clear that alternatives are not without their challenges, and the associated complexity and lower level of regulatory oversight is a concern for some. Consequently, it is particularly important to understand the performance of different asset classes and the implications of market developments. But despite this caution, alternatives continue to be widely used, with robust growth expected in the coming years. The Prequin report predicts that by 2023, 34,000 fund management firms will be active in this space – 21% more than in 2018. Meanwhile, a report published in 2018 by Context Capital Partners found that more than half of the European investors surveyed planned to increase their net positions in alternative investments by the end of the year. In the current market, the diversification offered by this sector does have an important role to play. Factors such as the prospect of rising bond yields, market volatility and the risk of an equities bubble may increase the appeal of uncorrelated assets. Likewise, increased regulatory oversight and a growing emphasis on sustainable and responsible investing by investors and fund managers may heighten the appeal of alternatives in the coming years. As Andrew Moylan, Global Head of Product Management at Prequin, states in the 2018 report: “Quite simply, most investors could not hope to meet their return expectations without alternative assets.”
Moving on up
Alternative investments can be defined in different ways. Ben Yearsley, Director at Shore Financial Planning, says that alternative investments are anything other than quoted equities, bonds and property. “So alternatives include private equity, commodity, hedge fund and absolute return, to name a few asset classes.” In addition to these asset classes, alternatives can also include a variety of other assets, such as aircraft leasing, farmland, timber, intellectual property and renewable energy. One notable feature of alternatives is that the different subsectors typically have low correlation with each other, as well as with stocks and bonds. Some alternative assets are used more widely than others. EY’s 2018 Global Alternative Fund Survey found that investors favoured hedge funds, which accounted for 40% of the alternative assets under management of those polled. Meanwhile, real estate accounted for 21% and private equity accounted for 18%, with ‘other alternative asset classes’ accounting for 9% of AUM. Private credit accounted for 9% and real assets 3%. This could change in the future, however. The Prequin report forecasts that private equity assets will grow by 58% by 2023, outstripping hedge funds as the largest alternative asset class. The report also predicts that natural resources will increase from $0.2 trillion in 2017 to $0.8 trillion in 2023, contributing to an increase in real assets to 13% of the alternatives industry in that timeframe.
What are alternatives?
Photos by Ethan McArthur, Guillaume Jaillet, Adam Morse and Jason Blackeye on Unsplash
Infrastructure - from airports to renewable energy - is a mainstay sub asset class in many of the world's alternatives funds
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contents
he popularity of alternative investments has grown substantially over the years since the financial crisis. The record-breaking volatility equities experienced in the late 00’s saw investors searching for opportunities outside the mainstream. This spurred the expansion of the alternatives sector, with a lot of new products launched promising investors a slice of something different to traditional asset classes. With markets now later in the cycle, interest rates on the road to normalising and the bull market of the last decade stuttering, alternatives are now in the limelight more than ever. But with so many different options available, which have the potential to be true diversifiers for investors? Here, we take a look at a few of the most popular types of alternatives, some key characteristics and important factors to consider when analysing different options.
With so many alternatives options available, Solomon Nevins, Senior Investment Manager at Architas asks: which have the potential to be true diversifiers for investors?
Weighing up the options
Ten years on from the global financial crisis, it’s possible we’ve seen much of this market cycle’s best returns already. Given this, we believe the case is compelling for diversifying into assets that can provide portfolios with downside protection but that also have the potential to provide positive returns. A bruising October for equity markets, followed by continued volatility in November and December brought investors in higher risk assets back down to earth with a bump despite the rally we have seen so far in 2019. As people seek out different avenues to find a return, we see real assets as being an area that has particularly strong potential for investors to diversify into. This is not to dismiss other areas of alternatives, but we think having exposure to a combination of real assets that have low beta, low correlation and limited drawdowns makes sense in this market environment.
Our view
Real assets
This sector comprises a wide array of investments linked to tangible assets. These range from social infrastructure funds that invest in street lighting and schools, to specialist property funds that operate in areas such as primary healthcare facilities and large-scale logistics centres. Real assets tend to be typified by a long-term investment horizon with steady cash flows. Another important aspect is that many assets can provide protection from the corrosive effects of higher inflation, while others can guard against rising interest rates, to maintain the real value of the asset. Currently, rising rates combined with a decelerating global growth outlook are proving a headwind for many areas of fixed income that investors typically look towards to provide protection from volatile equity markets. Real assets are a potential alternative solution in this market environment.
This type of fund aims to provide a steady return regardless of whether financial markets are gaining or falling. They typically use a combination of more complex financial instruments, such as options and futures. While the prospect of consistent returns regardless of market conditions is clearly attractive in periods of higher volatility, in practice returns across the sector have been mixed. Additionally, their complex nature and limited portfolio transparency can lead to periods of surprising performance. We have seen significant outflows from some of recent years’ most popular funds on the back of this combination.
Absolute return
Funds in this space tend to invest directly in privately held businesses. They look to take controlling stakes in firms with strong growth potential, aiming to benefit as they scale up and increase turnover, before then going public. Some big names that have benefited from private equity funding include Uber, which currently has plans for an initial public offering (IPO). The private nature of these businesses can create opportunities for managers to identify mis-pricing. The more hands-on nature of this type of investing can result in value creation that may not be possible from owning publicly-listed stocks. However, private companies may be smaller and less diversified than public companies, so they have the potential to be more sensitive to an economic downturn.
Private equity
Everyone wants their investment to grow in the long term, but there are some other key performance characteristics to consider when seeking an alternative investment.
Key factors to consider
The relationship between each asset class and the broader stock market is a key factor when looking for portfolio diversifiers. Given that the real assets sector is so broad, we have used property and infrastructure as examples, as they are two of the larger real assets sectors. The IA OE UK Direct Property sector includes commercial property as well as more specialist areas like student accommodation and healthcare assets. For absolute return funds we have highlighted three UAI (UCITS Alternative index) peer group averages to represent three of the most popular types of absolute return fund. Using the S&P 500 as the reference market, the UK property market has been almost completely uncorrelated over the past 10 years. Other assets demonstrate higher, yet still fairly low levels of correlation.
Correlation
An additional factor to be aware of is that alternatives in general, but more specifically real assets, can be more illiquid, i.e. at times they can be harder to sell at a fair price than some other major asset classes. However, as long as you maintain a long-term investment horizon – something we believe is key to investing – and you have other more liquid assets within the portfolio, then it’s a factor to be aware of, but not scared of.
IA OE UK Direct Property -0.01 Morningstar IT SS: Infrastructure 0.24 Morningstar IT Private Equity 0.48 UAI Event-Driven TR 0.54 UAI Macro TR 0.62 UAI Long/Short Equity TR 0.66
Beta is a useful measure to observe alongside correlation. We see investments with low beta – essentially those with lower levels of sensitivity to stock market movements – as a smart area to be in at the moment given the spike in volatility we’ve seen in equity markets recently. Taking a look at the ten-year beta figures for sector averages, with the S&P 500 used as the reference market, we see some quite different results, with both areas of real assets having the two lowest readings.
Beta
IA OE UK Direct Property 0.31 Morningstar IT SS: Infrastructure 0.43 UAI Event-Driven TR 0.53 UAI Macro TR 0.55 UAI Long/Short Equity TR 0.67 Morningstar IT Private Equity 0.97
Max drawdown
Downside protection is another important feature of alternatives. The table below shows the maximum peak to trough percentage decline of each sector average over the last 10 years, to the end of 2018.
Liquidity
IA OE UK Direct Property -7.91% UAI Long/Short Equity TR -16.30% UAI Macro TR -18.65% Morningstar IT SS: Infrastructure -18.71% Morningstar IT Private Equity -20.87% UAI Event-Driven TR -23.41%
Past performance is not a guide to future performance. The value of your client’s investment can go down as well as up and they may not get back what they originally invested.
Source: Morningstar Direct, as at 30 November 2018. Rebased in sterling where appropriate
Architas’ Jon Arthur and Avni Thakrar explain why investors are increasingly turning to alternative assets as a means to mitigate risk, hedge against inflation and generate a steady income
Has there been an upsurge in investing in alternative assets?
Avni Thakrar: There has been a significant increase in the number of funds now available to the retail market, and yes alternatives have certainly grown in popularity. In 2008 about 5% of a managed fund's allocation was in the alternative space; in 2017 it was closer to 22%. So there has been a huge increase and the benefits are becoming more well-known. Jon Arthur: In our view there are some really good opportunities out there in the alternatives space which could help improve the client journey, in terms of improving risk-adjusted returns and help achieve some much sought after diversification away from equities and bonds. With 90% of all asset classes delivering negative returns in 2018, investors are now increasingly looking beyond the more traditional options.
Jon: I think the key message for low-mid risk investors is diversification when it comes to alternatives. The huge diversity of choice available means that by investing in a broad basket of alternatives you can avoid a concentrated exposure to just one risk factor. For example social infrastructure and asset leasing tend to behave quite differently in terms of return profiles. Avni: In 2018 we entered later cycle dynamics and experienced an increase in volatility. We expect volatility will continue in 2019. Within the alternative asset class specifically, during this part of the market cycle, an increased allocation to market neutral/low beta strategies, inflation linked strategies or gold should help in periods of drawdown. However echoing the point Jon made this should be within a diversified portfolio of alternatives.
What should the asset allocation of an alternatives fund in today's environment look like?
Avni: Yes, we’re expecting market volatility to continue and sub-asset classes like asset leasing, specialist property, gold, anything with low beta sensitivity, could help cushion investors against this. Jon: Renewable infrastructure is another sub-asset class that has performed well. Lots of the underlying subsidies are linked to inflation; things like wind farms and solar energy. These subsidiaries tend not to get impacted by what's happening in the equity and bond markets. When we screen and select investments in the alternatives space, one of our key criteria is the correlation and how strong that relationship is to equities or bonds. There is a massive range of opportunities out there for UK investors. You've got maybe 2,500 alternative funds to choose from so it's a challenge to get the right mix.
Do you think diversification cushions investors against market volatility?
Avni: It has been designed to provide diversification to a more traditional portfolio, through the use of asset classes with a low correlation to the equity and fixed income market. It also has the potential to provide some level of inflation protection and some steady income. Jon: The fund also gives a diversified exposure to a range of liquid alternatives. That gives you a low correlation, or low sensitivity, to what's going on in bonds and equities. On top of the capital return, you've got a steady income of circa 3 to 3.5% each year. And then lastly, especially for those people in retirement, it's that inflation protection element.
What is the Architas Diversified Real Assets Fund designed to do?
Jon: In terms of the output, the overall portfolio volatility is nice and low. So, if you're going to put a figure on that, since our fund was launched, it's just under 3.5% on an annualised basis. That might be a third of the volatility of the equity market, something like that, so it's designed for that 'steady eddy' return. It's not going to be up 15%-20% each year, but it's a portfolio that will aim to give you long-term steady returns against a backdrop and an environment where things are a lot more uncertain. Trade deals with the US and China, the global slowdown; we've seen some massive movements either way in the markets. So not all investors want to have exposure to that. They want to have something which is what we'd call a volatility dampener.
What sort of diversification benefits do alternatives provide to the Architas Diversified Real Assets portfolio?
Jon: I mentioned there being 2,500 available investments in the alternative space, but some of those investments have been repackaged from vehicles that were previously designed only for institutional investors. So, within that, we would argue some of those just aren't suitable for retail investors in terms of their liquidity profile. Avni: When you mention alternatives, people do say: ‘what about the liquidity, it's a concern.’ We have around 90% of the fund in daily dealing holdings and we have a separate risk management team that report directly to the CEO so there's no mixing of investment management and risk management, which helps to remove any conflict of interest. We've got over 30 positions within the portfolio so we're not concentrated in any one area. It's a mix of managing the liquidity profile, not having too much concentration, and then also having that overlay of risk management within the business, which is really around how you look at the profile, how you manage it and who you flag it to.
What key risk parameters does the fund identify and how are you mitigating them?
Jon: The return profile in alternatives is completely different to what you experience in bonds and equities. They have different drivers, whether it be things like asset backed securities or infrastructure programmes, and they're not driven by the broader market sentiment. That's why you have them in a portfolio. Overall an alternatives portfolio can be constructed so it is not at the mercy of rate rise speculation, like most asset classes were in 2018. The Architas Diversified Real Assets fund has around 80% exposure to inflation sensitive assets so as inflation goes up, your returns should go up. Lots of the underlying income streams are linked to RPI and CPI. And what’s more you don't have the duration of, say, a bond fund which is one of the things that hurt fixed income investors in 2018.
Have the returns in the alternatives space come down in line with yields in more traditional asset classes?
Past performance is not a guide to future performance. The value of your client’s investment and the income derived from them can go down as well as up and they may not get back what they originally invested
Jon Arthur,
Multi-Asset Product Specialist, Architas
Avni Thakrar,
In 2008 about 5% of a managed fund's allocation was in the alternative space; in 2017 it was closer to 22%
Alternative assets: why do you need them, what are the best ones and how many should you own? At a recent Architas event the experts brought their experience to bear, and we asked several advisers if alternatives now have more appeal for their clients
Alternatives is a catch-all term for any investment that doesn’t fit into the traditional buckets of equities, bonds or cash. So it covers a wide range of investments including property, commodities, infrastructure, private equity and absolute return funds. The goal of adding these assets to a portfolio can be to reduce volatility or enhance returns. It really depends on the investor's perspective but generally the common aim is to improve diversification within a portfolio. Alongside this, some investors will look to alternatives as a different source of income or a way to add inflation protection within the portfolio. While alternatives can be a great diversifier they still carry risk. For any sort of return, investors have to understand the potential for loss. In the case of alternatives that risk will be different to the risk they face in their equity and bond investments but it’s something that investors need to understand. Alternatives are generally not that widely covered by the mainstream press so investors need to go that bit deeper with their analysis in order to be comfortable with the investment. Investors will want to look at the liquidity risk and also the political risk and regulatory risk that can impact these types of alternative assets. In many cases property or infrastructure investments will have some impact on the general publics’ lives and therefore can be subject to changing regulatory and political winds. So it’s something you need to be on top of as a source of risk.”
Images from Architas World Market Review events
Solomon Nevins,
Senior Investment Manager, Architas
Nick Davison,
Investment Development Manager, Architas
The investing world has changed a lot since the days of building portfolios from cash, fixed interest, equities and property. In fact the weighting of alternatives in professional portfolios and the UK managed sector has increased significantly over the last ten years – from around 5-6% to 22-23%. Alternatives can be used by advisers to help them get greater diversification into the portfolio and at the same time give them some downside protection, plus reduce the maximum drawdowns that clients just don’t like to see. “The problem for advisers from what they tell me is that typically the alternatives asset class has been a difficult area to research. So unlike looking at equity funds where you can review ratios such as alpha, beta and Sharpe etc., there’s much more due diligence to be done to find the right alternative asset fund. This may be one of the reasons that has driven many advisers to use absolute return – however, this is just one of the small sub-asset classes within alternatives."
We put our clients into a mixture of multi-asset, risk-adjusted portfolios but we do mainly run our own portfolios which include multi-asset funds.
Stephen Conway,
Wade Financial
Do you put your clients into model portfolios, multi-asset portfolios or other?
In a market short on diversity and returns do alternatives now have more appeal?
Paul Rose,
Paul Rose Financial Planning
Alan Todd,
Aspire Wealth Limited
Chris Jeffels,
Mosaac
Kailesh Patel,
Alka Financial Services
Yes definitely. Over the last few years, to diversify our portfolios, we’ve used some of the multi-asset funds in order to get a reduction in the level of risk we’re taking for clients.We introduced alternatives into our model portfolios really as a diversifier away from asset classes like bonds and as a proxy for cash, certainly at the lower end of the risk scale.
How we look after client interests will depend on their individual circumstances so sometimes I use model portfolios but often, these days, it is multi-asset funds. Every client is unique so we audit their needs before making a recommendation.
Indeed. Alternatives have suddenly become a lot more focused in the last few years – things like aircraft leasing and different property vehicles are becoming more popular. I don’t see why they won’t continue to grow in popularity given the returns they’ve produced so far.
I tend to use a lot of model portfolios because they give good value to the clients and a lot of clients seem happy with them. Maybe that’s a bit boring but as long as the clients are happy, I’m happy.
Yes I think they do have more appeal because if you can give clients an alternative to what’s in the mainstream they find it helpful. At the end of the day, it’s about what the client chooses. We’ve got to try and give them what they’re looking for so, yes, I think alternatives do have a place today.
We put our clients in risk-rated multi asset portfolios which allows us to provide diversification and a risk managed solution.
Alternatives are appealing because traditional investments have been behaving strangely over the last couple of years. So they provide diversification and a good hedge, I think.
We use a combination of all three. Every client is different so it’s about making sure we don’t pigeonhole anybody.
Yes. We’ve been looking at alternatives for almost seven years now. Clients find them interesting. I monitor real assets and there are some interesting ideas out there like leasing aeroplanes. It’s certainly an exciting area for my clients.
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We look at how the Architas Diversified Real Assets Fund is designed to help diversify portfolios away from traditional equities and bonds, provide a stable income and protect against the effects of inflation
Introducing the Architas Diversified Real Assets Fund
A Dynamic Planner Risk Rating of 4 (1)
An FE Risk Score of 28 (2)
3.46% yield (historic)
4-year track record (3)
The Architas company and fund data for the Architas Diversified Real Assets Fund D Net Inc is provided by Architas as at 31 March 2019. Past performance is not a guide to future performance. The value of your client’s investment can go down as well as up and they may not get back what they originally invested.
(1) The Dynamic Planner Risk Rating as at 31 December 2018 is provided by Distribution Technology. (2) The FE Risk Score is provided by FE Analytics as at 24 April 2019. (3) Fund launch as at 5 August 2014. (4) Assets under management and advice as at 31 March 2019.
Architas has over £496 million invested in alternative assets
Fund size £241 million
87% invested in inflation sensitive assets
37 underlying funds
Architas has £23 billion assets under management and under advice (4)
20 investment professionals
16 sub-asset classes
Portfolio snapshot: emphasising diversification
Mayank Markanday, co-manager of the Architas Diversified Real Assets Fund, discusses a key step when constructing an alternatives portfolio. “One of the most important steps when constructing an alternatives portfolio is liquidity. We view liquidity as an explicit objective and we manage it on an active basis. In our DRA fund, 60% of the portfolio can be liquidated in one day and 100% of the fund can be liquidated in five days if there is a need. So liquidity is something that myself and Solomon Nevins, the fund’s co-manager, look at on a daily basis when we invest in these underlying alternatives. We have a separate team – a risk team – that also look at liquidity and they do that independently. Anytime there is a breach of liquidity, they are aware. So let’s say liquidity falls below a 50% level: they would notify us and we’d take appropriate action to keep that in line with the objective of the fund.”
Matching the liquidity profile to client needs
Some of the fund’s portfolio is invested in non-mainstream assets, which during periods of stressed market conditions may be difficult to sell at a fair price, which may in turn cause prices to fluctuate more sharply than usual.
Source: Architas, as at 31 March 2019. Due to rounding, the figures shown in each of the above sections may not add up to 100% and the allocations may change.
Portfolio snapshot: a view on performance
The investment team research and analyse thousands of funds to find the best combination of underlying funds to make up the investment portfolio. They carry out thorough analysis of the fund managers and how their funds have performed, as well as carrying out in-depth research on the asset class to find where the best opportunities are. When the Diversified Real Assets Fund managers have chosen a fund and added it to the portfolio, it will be regularly monitored to make sure it is performing as expected. If a fund does not perform as the investment team expect or if there is a significant change in how that fund is managed, the Diversified Real Assets Fund team will take the decision to replace the fund with a more suitable alternative. This is one of the benefits of Architas’ large team. The managers have effective processes to ensure underlying funds are closely monitored.
CUMULATIVE PERFORMANCE SINCE INCEPTION (5 AUGUST 2014)
Source of line chart and discrete performance: State Street, as at 31 March 2019. Performance of the Architas Diversified Real Assets Fund D Net Inc share class shown. All index data from Morningstar, at 31 March 2019. For performance prior to the launch of the D share class (1 December 2014), the track record of the A share class is used. Total return figures are calculated on a single pricing basis. Performance figures D Net Inc are shown in sterling unless otherwise specified. The fund performance figures take into account the annual management charges but not the initial charges or policy charges that would be payable, which will have the effect of reducing the past performance figures shown.
DISCRETE PERFORMANCE FOR PAST 5 YEARS
DIVERSIFICATION ACROSS ASSET CLASSES
DIVERSIFICATION ACROSS INVESTMENT MANAGERS
