What’s the alternative?
When looking at True Potential Asset Allocation tables you will find Alternatives. But what exactly are they and why their rise to prominence?
In truth they are effectively “others”. Investments that don’t fall within the traditional nomenclature of equities, bonds and cash. Historically the “Alts” category may have been dominated by property-based investments, which typically generate a higher income and are influenced by interest rate movements (like a bond) but also exhibit long term capital growth (like an equity).
Although differing widely, the various strategies we employ have one thing in common: a low correlation to the traditional drivers of return in both bond and equity markets.
This now diverse asset class has mushroomed in recent years as investors anticipated an end to the “lower for longer” movement of interest rates, which has served the bond markets so well. Additionally, as equity markets, particularly in the US, have become sector dominated, technology being the prime example, alternatives cast the net a lot wider.
As you would expect, True Potential has not been slow in adopting a wide range of alternative investments within our Portfolio range as part and parcel of the Advanced Diversification ethos we promote.
Historically one of the great “hedges”, or means of investing away from the bond and equity markets, has been gold. Regarded through time as a “store of value” its price has ebbed and flowed but, critically, that volatility has been independent of conventional investments and with investors facing geopolitical turmoil and rising inflation gold is enjoying a resurgence.
Another long-term Alternative in the True Potential Portfolios has been CARS, the Currency Allocation Return Strategy, run by our partners at UBS. Arguably the most liquid of investments, the international foreign exchange markets come closest to the theoretical ideal of all practitioners having the same access to identical information. Driven by trade flows, GDP growth, inflation, interest rates, speculation and investor sentiment, currencies can swing back and forth, sometimes markedly. However, they tend to revert to “fair value”, the level determined by international demand for the currency based on trade flows and their relative attractiveness compared to other international currencies. Their cycles are independent of bond and equity markets and offer the potential for uncorrelated returns.
Another area of the investment market is the world of “derivatives”, financial instruments such as futures and options that “derive” their performance from an underlying asset but allow investors to profit from either a rise or a fall in the price of the “underlying”, be it an index, an equity, bond, currency or commodity.
Such strategies can be effectively combined to generate long term returns and enhance diversification characteristics. These funds operate a myriad of strategies. Some opt for algorithm driven computer programmes devoid of human intervention, others employ seasoned market professionals backed up by teams of analysts to make market beating calls. As ever, we adopt a diversified approach holding a variety of strategies, adopting different approaches generating varying outcomes.
Historically the preserve of the large investment houses, much of our alternatives exposure is through our partners at Goldman Sachs, Allianz, 7IM and Schroders. In addition, we have recently added a product which follows market trends using analysis to identify patterns from signals generated across global markets, implementing these in the most efficient and effective manner. Drawing on the expertise of US based AQR Capital Management, we have added this strategy to the portfolios via our own Growth Aligned fund range. While perhaps not a household name in the UK, AQR is very highly regarded, based in Greenwich, Connecticut, a pioneer in alternative investing, with a strong track record of managing complex strategies.
As ever, the future is uncertain with challenging headwinds. The beauty of the multi asset approach is that there is always an area of the market offering opportunity. The joy of Alternative Investments is that they help us to navigate potentially choppy waters and pursue our policy of Advanced Diversification.