Alternatives – are they durable and are they profitable?
CAMRADATA publishes new whitepaper based on annual their Alternative’s event
CAMRADATA, a leading provider of data and analysis for institutional investors, has published its latest white paper, ‘What’s the Alternative?’ following its annual Alternatives roundtable in December 2018, where leading investment managers, consultants and asset owners discussed the attractiveness of illiquid alternative strategies.
The participants were from Allianz Global Investors, MV Credit Partners LLP, Nuveen Real Estate, Antares Managing Agency Limited, Cambridge Associates, Kirstein, MJ Hudson Allenbridge and PwC.
Investors are increasingly looking beyond traditional equities and bonds, with several top 10 pension schemes stating that they are investing up to a third of their strategies in alternatives.
The panel met to discuss the challenges and durability of alternative strategies, as these investments are starting to steal the limelight.
Sean Thompson, Managing Director, CAMRADATA said, “Allocating to alternative strategies has many benefits for institutional investors, including the ability to achieve diversification and flexibility, alongside long-term steady returns.
“Whether looking at investing in renewables, infrastructure, leasing or credit; seemingly private market investments are beating the wider market. That said, arguably alternative investments can come with challenges. The big question for our panel was, are they durable and are they profitable?”
The discussion focused on well-known alternatives such as real-estate and new forms of debt that are becoming available to investors. The panel considered where these fit into portfolios at this stage in the credit cycle.
Reza Mahmud, a senior consultant at PwC, said, “There is so much going on for UK pension schemes that trustees need help to understand the benefits and challenges of the wide range of alternatives available. Alternatives are highly idiosyncratic investments and can be complex.”
Challenges and risks
The challenges including overcrowding, a major fear for investors today, as the search for yield continues were discussed, plus the asset managers on the panel were asked whether they were worried by current market conditions.
Populism and geopolitical risks were also highlighted. Adrian Jones, senior portfolio manager within the Alternative Assets division at Allianz Global Investors, responded that it wasn’t Allianz Global Investors’ role to predict what might happen but to plan for eventualities. He said: “Change is a risk, but we don’t try to guess right.”
The discussion then considered real-estate – often described as the original alternative. Alice Breheny, Global Head of Research at Nuveen Real, urged investors to consider the characteristics of the various sub-classes of real estate available.
Alice said, “Buying a “core” portfolio of high-quality office blocks in the world’s richest cities or leading financial centres will not capture all the diversifying benefits.” Rather than relying on such obvious “core” types of asset, she suggested a broader, more thematic approach.
Finally, the panel discussed the lightening of covenants in private-equity backed debt issuance. Previous CAMRADATA roundtables have discussed the dangers of the trend.
Murtaza Merchant Partner and Head of the Fund Optimisation Team at MV Credit Partners LLP, said, “Sometimes I think all the talk about covenants emanates from law firms, who are keen on demonstrating the value they add to sponsors.”
Sean Thompson concluded, “At the end of a very interesting discussion the final question posed was if there are benefits of lower volatility and higher returns from these types of investments, why more weight isn’t given to alternatives. Many on the panel agreed that 5 percent was an insufficient allocation. The CAMRADATA panel will meet again this year to discover whether allocations will indeed continue to rise.”