While fund selectors would consider alternative investments – such as real estate, managed futures and derivatives contracts – as a fixed income replacement in the current low yield environment, they are not actually investing in it, according to Natixis Investment Managers.
The firm’s executive director of the durable portfolio construction research centre, David Goodsell, said while fund buyers believed that alternatives were essential for diversification they were not increasing or using the asset class.
“We saw around 25% of institutions using other assets as fixed income replacements and I think the fund buyers were around 17%. That 8% is a massive margin if you think about the amount of money being managed,” he said.
“That would be one area to pay attention to and that’s why institutions are going to private markets. Private debt has become hugely important along with infrastructure. It’s a great diversifier and a great long-term return/income generator as well.”
Source: FE Analytics
According to FE Analytics, the top infrastructure focused European-domiciled fund is Amundi’s Equity India Infrastructure SU Cap at 18.9% for the three years to 30 April 2018.
This was followed by DNCA Invest’s Infrastructure (LIFE) B at 9.4%, Franklin Global Listed Infrastructure W Accumulation at 5.96%, First State Global Listed Infrastructure I Dis at 5.1%, and Franklin Global listed Infrastructure A Accumulation at 3.6%.
The data found that only seven funds gave positive returns during the same time period. However, when looking at five year and 10 year performance all the funds had positive returns suggesting a longer investment time frame for infrastructure funds.
Goodsell said multi-asset, global macro, and infrastructure funds were able to generate returns and hit expectations during all markets.
According to Morningstar data, fund flows into alternative funds increased by €9.7bn during April 2018. The most flows went to absolute return strategies at €5.5bn, followed by alternative long/short debt at €1.5bn
Fund buyer challenges
He said the biggest challenge for fund buyers were predicting what was going to happen next in terms of geopolitics, how interest rates were going to affect investments, and how to anticipate how monetary policy, interest rate policy would shift so that their investments were not hit by both credit and duration risk.
Goodsell said active management was important when dealing with these challenges by focusing on individual companies rather than just what was happening in the markets overall.
“Looking at alternatives as a bigger part of the portfolio and using active management will really help them in this environment,” he said.
“It’s really coming back to this idea of holistic management in a portfolio – how do those pieces fit together. It’s all enhancements and refinement of process but you don’t want to see that process change, just evolve.”
The top funds were found using FE Analytics FCA Recognised and Offshore Mutual universes and that were domiciled in either Luxembourg or Ireland.