Alternative investment strategies for beating volatility
16 March 2020
As stock markets suffer their worst falls in over a decade, how can investors ride out turbulence and target returns? Claire Madden, Managing Partner, looks at the options.
Timing the stock market is never easy at the best of times, but in the current environment, it’s harder than ever. At the end of February, US President Donald Trump advised investors to “buy the dip” after US equities saw their worst fall in two years , only for global markets to suffer their most dramatic drop since the financial crisis two weeks later, as oil prices plummeted and fears over coronavirus took hold. Where will they go next? The only certainty right now appears to be volatility.
It’s periods of extreme market stress like this when the value of true portfolio diversification is most clearly demonstrated. By true diversification I mean a varied asset mix that goes beyond simply holding multiple different equity or bond funds (where the performance of underlying holdings is often strongly correlated), cash and perhaps some residential property.
Including a range of alternative assets with differing characteristics alongside these traditional asset classes improves overall diversification. Investments with different timeframes, strategies and returns drivers, and that are uncorrelated to mainstream market movements, can then dilute the impact of ‘black swan’ events on a portfolio by reducing overall volatility. For example:
Private equity funds
Private equity funds tend to have relatively long term horizons making them a good counterbalance to daily priced liquid public markets. We’ve offered our clients direct access to these institutional-grade investments through managers like TriSpan. But there’s also a route in by providing liquidity to investors already in those funds who are looking for cash. Managers like 17Capital pioneered this private equity liquidity strategy. The current market dislocation is likely to be beneficial: uncertainty will delay some portfolio realisations, and investors will need to seek liquidity.
Commercial real estate / property with a difference
Real estate strategies tend to have medium to long-term investment timeframes meaning short term volatility can be avoided. In particular, strategies that focus on commercial property assets underpinned by long-term trends, such as care homes (ageing population) and logistics warehouses (storage and fulfilment for last-mile goods delivery), again are unlikely to be affected by short term dislocations. Fund managers with active asset management or asset repositioning strategies can often pick up well priced assets from motivated sellers requiring liquidity during periods such as this.
Clean energy strategies
Renewable or clean energy is no longer a niche concern. Most developed economies have government-set targets for carbon neutrality and by 2050, clean energy is expected to deliver 87% of Europe’s electricity . Accessing energy responsibly is increasingly important to blue chip corporates, which must demonstrate their commitment to carbon neutrality to protect and evolve their brands. Clearly this is a huge growth market.
With wind and solar established and expanding, and huge potential emerging in areas like battery storage, this is a market poised to perform, whatever happens in other parts of the economy and is one that should be capable of tolerating blips caused by, for example, cheaper oil prices.
Until central governments come up with a way to buoy the markets with co-ordinated action or unless monetary policy fully addresses the impact of a global growth slowdown (which is unlikely), investors attempting to time the bottom of the market could come unstuck.
A more sensible approach - and one that shouldn’t have to wait for a crisis to happen – is to hunt for good opportunities away from the rest of the herd, spreading capital across a wide variety of assets which are both differentiated from the mainstream, and different from each other. Limiting exposure to heavily correlated asset classes increases risks and magnifies shocks. Investors must broaden their horizons, adjusting and expanding their portfolio mix to ramp up resilience against this ongoing state of upheaval. More of the same won’t cut it. It’s time to seek out alternatives.