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Investors urged to consider alternatives

Investors worried about equity markets being fully valued could benefit from looking to alternative investments, says the managing director of Nikko Asset Management in New Zealand.

Friday, May 8th 2015, 6:00AM 4 Comments

by Susan Edmunds

After number of very strong years, equities are now being described as virtually fully priced.

But with interest rates and bond yields still low, investors who move their portfolio into income-producing assets instead are faced with returns that are not high enough to meet their requirements.

Peter Lynn, of Nikko NZ, said the solution could be to consider alternative investments.

“They’re often cast out as incredibly risky. But we’ve invested in a fund of hedge funds managed by JP Morgan since 2001. With the exception of cash, it’s the most consistent investment we have. It invests in 40 different hedge funds and each may be doing something that is quite volatile and quite risky but they’ve got their due diligence and risk analysis process down so well that they can package those 40 risky investments together and have a very nice, smooth outcome.”

Nikko NZ’s balanced fund had a large weighting, currently 20%, to alternative assets, Lynn said. “That I think is a more sensible solution than trying to go really defensive. It should be diversified.”

Investors should not be encouraged to give up their equities at this stage, even if they thought they were fully valued, he said. Global moves such as the European Central Bank’s qualitative easing would support the markets for some time yet.

“Almost every week there’s another record high and you don’t want to miss out too much on that. But you need to have those defensive assets for when things do go south... But the expected return you’re getting out of those income assets is very low. You need other things that are not correlated to equities or bonds that are going to produce a reasonable return, mitigate the risk of an equity market fall or bond yield rise. This is the perfect time for alternative investments.”

He said active managers would be given a chance to shine when equity markets finally came off the boil. “Equity values may not rise much more but there are a number of stocks globally that are underpriced. It’s up to a good manager to find those and pick them out.”

While passive managers did well in a strong market, he said a good active manager should be able to mitigate a downside to the market, by finding underappreciate stocks that were not going to fall and might have further room to rise. 

“It’s turning into a stock-picker’s market," Lynn said.

Tags: equities Fixed interest Nikko AM

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Comments from our readers

On 8 May 2015 at 11:06 am Pragmatic said:
Whilst I don’t accept that all equities are virtually full priced at the moment (resources???), I agree with the sentiment that markets are stretched, and that all portfolios should consider all available options to deliver a better risk adjusted outcome.

Over the years, the passive zealots bang their drums around this time of the investment cycle claiming that price is the most important differentiator. The irony is that they soon go quiet after an inevitable market re-rating, when preservation of capital becomes the all-important criteria for investors.

Funnily enough, the language of this industry has changed over the years whereby absolute return styled investments that were a common place investment style pre the rise of the asset consultants, are now included within the ‘alternative’ category.
On 8 May 2015 at 11:24 am Brent Sheather said:
I am always sceptical of alternative investments so it would be nice to see some numbers eg: “a very nice smooth outcome” could be losses of 1% a year or flat lining. I would like to see what the returns are before they were artificially enhanced by any hedging gains. I had always thought that alternative assets were just assets which were vulnerable to all the same problems like rising interest rates and poor management except they were burdened with higher fees so it would be good to know what the weighted average look through management expense ratio was and whether all investors in the fund pay the same annual fee. This is vital information if we are to “put client’s interests first”.

Regards
Brent Sheather
On 13 May 2015 at 2:06 pm Peter Lynn said:
Appreciate the comments, Brent, and we're happy to provide some numbers.

A degree of scepticism is well placed when considering any investment. While alternative investments in isolation can have volatile (and not always positive) outcomes, the fund I was referring to is a combination of 40 alternative funds and has an overall volatility of just over 3% p.a. (comparable to NZ bonds) and returns for the past three years have been 9% p.a. (net of management and performance fees). The management fees for this fund are the same for all Nikko AM NZ clients.

Kind regards
Peter Lynn
On 14 May 2015 at 9:44 am Brent Sheather said:
Thanks for that and yes those returns and standard deviation figures do look good. Hedge funds will have their day again as soon as equity markets start to falter.

Regards
Brent Sheather

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