Trends in alternative asset funds: what’s the big picture?
23 July 2019
Our clients know that the case for investing in alternative assets is compelling. But it’s useful to put this into context: what trends have been coming to the fore in recent months? Which strategies have the greatest potential and what is likely to shape the alternative asset funds market - and the types of fund opportunities we offer – looking ahead?
It’s clear that at this stage in the economic cycle, investment managers are paying more attention to alternative assets as they focus on yield and seek to smooth out the impact of volatility. So much so that many mainstream players are entering the arena.
Just look at the decision by the Woodford Equity Income Fund, the star manager-run retail fund ostensibly focusing on liquid equity investments, to include an allocation to unlisted company shares in its portfolio.
Woodford recognised that seeking out the hidden value in SMEs can be a smart strategy, and given time, those investments may well have generated positive outcomes.
That the move was intensely scrutinised by the media and regulator is due, not to the soundness of those investments, but the mismatch between the open-ended fund structure and the illiquid nature of these underlying assets, creating liquidity problems.
The furore underlines the importance of transparency: funds must be clear about the strategies they put to clients and demonstrate that they are structured correctly for the types of assets held. It highlights too the risks for the unwary if alternative assets move into the mainstream “retail” market. Fund investors must understand what they’re buying.
Seeking out the best market opportunities
But for sophisticated private investors with the right experience and risk appetite, which alternative asset fund strategies are gaining prominence in the market and where might the best opportunities lie?
Though we keep an open mind and consider many different types of funds, there are several particular areas of interest currently:
- Private Equity funds – we look for expert managers with a specific specialism e.g. focusing on a market niche or a value-adding strategy such as a “buy and build” approach
- ESG investing – Ethical, Social and Governance-focussed investments are a hot topic. Long-dated, cash-generative funds investing in green energy infrastructure could be exciting options
- Real asset funds – asset-backed investments in shipping or aircraft, infrastructure or property are high on the radar, with a view to delivering risk-adjusted returns while preserving value
- Non-correlation to traditional asset classes – we have strong relationships with fund managers in specialist fields like litigation funding and debt funds and are exploring new avenues such as art or music royalty funds
- Co-investment opportunities alongside funds – enabling clients to participate direct in specific asset investments within fund portfolios, as well as in the fund itself, is a unique opportunity we are investigating.
For us, it comes down to the quality of the fund manager and the value-add they can deliver. Good opportunities can exist almost anywhere – we’re looking for experts with the know-how to identify and capitalise on them. It’s a strategy that has served us well, and will continue to underpin our decision-making going forward.
Lorna Robertson, Head of Funds. July 2019