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From debt to gold and beyond: Super Allocators' top alternative calls

TOP 30 SUPER ALLOCATORS: Private bank CIOs reveal which alternative sectors they like at the moment.

The views of our top asset allocators on alternative asset classes are mixed, as quite a few sub-asset classes – particularly absolute return funds – haven’t delivered on their promises.

But in general, the CIOs of private banks hold around 15% exposure to alternatives, excluding equities and bonds, if the overall average portfolio is 100%.

More than half of them are not planning to increase their exposure to the asset class this year, with the highest number of the potential increase in 2019 being 5%. We ask private bank CIOs which areas they are looking into the alternatives space.

These comments originally appeared in the Top 30 Super Allocators publication, which came out in June.

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The views of our top asset allocators on alternative asset classes are mixed, as quite a few sub-asset classes – particularly absolute return funds – haven’t delivered on their promises.

But in general, the CIOs of private banks hold around 15% exposure to alternatives, excluding equities and bonds, if the overall average portfolio is 100%.

More than half of them are not planning to increase their exposure to the asset class this year, with the highest number of the potential increase in 2019 being 5%. We ask private bank CIOs which areas they are looking into the alternatives space.

These comments originally appeared in the Top 30 Super Allocators publication, which came out in June.

Florènt Brones, CIO, BNP Paribas

What is the most promising area of alternative investments at the moment?

We are convinced that the dollar will be weaker 12 months down the road because of structural factors. However, because of those political issues concerning Europe, we have decided to lower our target regarding the euro/dollar towards 1.14 in three months and 1.18 in 12 months.

After a 39% rise in the beginning of the year, we have decided to adopt a neutral stance on the oil price. Brent crude reached $75-per-barrel, which is the highest end of the range we expect for the next 12 months.

Fundamentally, we think the supply of oil exists, it is abundant, especially in Opec and Russia and so, we believe that the market will rebalance. There is not enough potential to remain positive on the oil price. So, we have no fundamental reason to increase our forecast range for the future.

Henning Gebhardt, head of wealth and asset management, Berenberg

What is the most promising area of alternative investments at the moment?

One of the most interesting alternative investments at the moment is volatility as an asset class. Volatility can generate income via the constant ups and downs of the stock exchanges. In addition, it reduces the overall risk of a portfolio through diversification, since volatility does not correlate with other asset classes.

In times of uncertainty, this premium shines and provides for attractive diversifying returns. The most promising area of volatility is risk premia strategies with solid economic underpinnings. Our focus right now lies in the volatility risk premium.

In our view, this alternative risk premium is the premium with the most robust economic and empirical foundation. However, implementation is key, especially with regard to liquidity risks. We only focus on very liquid listed and OTC markets. Here, we can benefit from more than 10 years experience in this area.

Lars Kalbreier, CIO, Vontobel

What is the most promising area of alternative investments at the moment?

Although the wave of regulation following the financial crisis has caused some grumbling within the industry, it has also created opportunities. This is especially true for the private debt market, where financial institutions, both from the banking and the insurance sectors, had to retreat from certain areas of the market.

This comes on the back of increasingly harsh capital constraints on their balance sheets. Specialised alternative asset management boutiques are now filling this space. While these tend to offer decent returns, enhanced operational due diligence needs to be performed as these boutiques are very small and sometimes do not satisfy institutional standards.

We diversify our investments in the private debt markets, by diversifying across fund providers, underlying debt sectors, geographies and maturity profiles.

Carlos Mejia, CIO, Rothschild & Co Wealth Management

What is the most promising area of alternative investments at the moment?

Rothschild & Co’s Wealth Management clients are increasingly attracted by private markets as an alternative investment strategy. Private equity and debt funds help our private wealth clients to diversify and lower the volatility of their multi-asset class portfolios while gaining access to companies during critical stages of their growth and development.

We take great lengths to ensure they understand the investment characteristics of private equity and debt strategies. This includes: an appreciation of the different risk-reward profiles and divestment periods available to clients via primary, secondary and multi-manager private equity strategies; and returns available in private debt investment strategies via direct lending or syndicated loan lending.

While private markets traditionally offered clients lower levels of liquidity, a growing secondary market for private equity investors gives new options for clients looking to exit existing holdings.

Christian Nolting, Global CIO, Deutsche Bank WM

What is the most promising area of alternative investments at the moment?

We like to divide portfolios into low and non-correlated risk factors and include alternative assets with respective characteristics. The proportion of alternatives investors might consider investing in is likely to be affected by their risk profile.

Broadly speaking, the percentage distribution should have the shape of a rather skewed bell curve, with defensive and balanced portfolios having the highest allocations. Higher growth portfolios with a high allocation to equities may benefit from a rather lower allocation to alternatives, primarily for diversification (rather than return) purposes. At the other end of the curve, the allocation to alternatives in cautious portfolios is likely to be relatively small.

We currently have a neutral position on any overall allocation to liquid alternatives in a balanced portfolio. We have a positive view on equity market neutral; a neutral/positive view on macro, event driven and credit; and a neutral view on CTA, equity long/short and distressed.

Alan Mudie, global head of investment strategy, Societe Generale Private Banking

What is the most promising area of alternative investments at the moment? How are you tapping into these themes and also managing illiquidity risks?

When we talk about alternatives and illiquidity, I think we should bear in mind debt. The overhang of debt, compared to the ability of the global economy to service and to repay that debt.

This is a structural issue that will remain with us for years, if not decades to come. So, if we did have a resurgence in inflation, I would view that as possibly good news longer term.

It would give the global economy, the ability, in nominal terms, to actually begin to grow to mitigate or compensate for the size of the debt burden that we face today. So longer-term, I think we should hope for inflation and not fear it.

In terms of diversification, I’d agree with those in my position that have mentioned gold, we still hold gold in portfolios and as shown in December, gold does trade very differently to other assets held in portfolios. We think that will hold true for the long-term.

 

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