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Where’s the value?

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18 November 2016

Peter Webster explains the rationale for a flexible investment mandate when both equities and bonds are expensive.

Peter Webster, Assistant Fund Manager at Henderson Global Investors working alongside Ian Barrass & James de Bunsen, Henderson Alternative Strategies Trust.

The AIC Flexible Investment Sector contains a broad range of investment companies with various strategies united by the fact that they may all invest across multiple asset classes.             

Traditionally, investing across asset classes has allowed investors to diversify their portfolios in order to reduce risk and improve the risk-adjusted returns that they are able to generate.  Investors who have created portfolios from a balanced exposure to equities and developed market government bonds will have generated significant returns in recent years as both markets have performed strongly.  Although this has obviously been positive for investors one concerning side effect is that the diversification benefit of holding both equities and developed market government bonds has fallen as the correlation between the two asset classes has turned positive. 

There are a number of reasons as to why now is a good time for investors to access flexible investment mandates.  World equity markets have failed to rise above mid-2015 levels in local currency terms and developed market government bond yields have been moving higher since June 2016, meaning prices have fallen.  With the US Federal Reserve having stepped away from monetary easing and both the European Central Bank and Bank of Japan running out of assets to buy, it appears monetary policy may have reached its limits.  As government bond yields have collapsed investors have sought returns from equities, driving up their valuations despite anaemic world growth since the financial crisis.  With both equity and bond markets trading expensively, monetary support falling and political shocks increasing, it is an opportune time for investors to seek alternative and more flexible investment mandates to generate performance. 

Henderson Alternatives Strategies Trust (HAST) is a member of the AIC Flexible Investment Sector peer group and provides access to alternative and specialist asset classes. The Trust focusses on Private Equity, Specialist Sector, Specialist Geography, Hedge Fund and Property investments.  With valuations high across asset classes we have been increasing our exposure to long/short hedge fund managers with a proven ability to generate returns during both up and down markets.  Whilst listed equities have struggled to generate strong earnings in recent years private equity firms have shown an ability to improve efficiency and cut costs to expand margins whilst also growing top-line revenues.  We continue to find opportunities within private equity, attracted by finding growth in a low-growth world.  Last of all we have a positive outlook on floating-rate credit instruments, instruments that re-price based on a benchmark rate of interest.  Our positive outlook is driven by historically low borrowing rates leading to low default rates, high yields in a yield starved environment and the fact that the floating rate nature of these instruments protects against any rise in benchmark interest rates.                      

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