Unlocking Wealth: How Alternatives Supercharge Your Multi-Asset Portfolio!
Join the Investment Revolution: Understanding the Power of Alternatives in Your Portfolio
Imagine transforming your investment strategy with insights from leading experts in the field! In a recent dynamic webinar, industry pros gathered to illuminate the crucial role of alternative assets in modern multi-asset portfolios. With the vibrant discussions co-led by a seasoned financial journalist duo, the session brought forth invaluable perspectives from knowledgeable fund managers, Aimee Bowkett and James Giblin, who shared their expertise and innovative strategies for navigating today’s complex market.
Aimee succinctly captured the essence of the session: “We dive deep into the benefits of diversification in the current market landscape, exploring how a greater allocation to alternative asset classes can not only enhance diversification but also redefine what ‘alternatives’ mean for our portfolios.”
To pique your interest, we’ve compiled a snapshot of the key insights shared during this eye-opening webinar.
Decoding Alternatives: What Are They Exactly?
The conversation kicked off with an essential question: What do we really mean when we refer to “alternatives” in investing? Aimee Bowkett clarified that alternatives encompass any asset class beyond the traditional trio of stocks, bonds, and cash. By venturing into alternatives, investors aim to tap into assets that offer distinct return patterns compared to conventional investments. As Aimee eloquently stated, the ultimate objective is to “achieve superior risk-adjusted returns and enhance overall portfolio diversification.”
James Giblin chimed in, emphasizing the missed opportunities that lie in alternatives while many remain fixated on traditional investments. “If there’s a free lunch available, we should definitely take advantage of it,” he remarked, highlighting the diversification benefits that alternatives can usher into a portfolio.
Unlocking the Diversification Benefits of Alternatives
One of the standout themes of the webinar was the remarkable diversification that alternative assets offer. Both Aimee and James passionately highlighted how allocating investments across varied asset types mitigates unrewarded risks and leads to more stable outcomes over time. James illustrated this concept with a clever analogy, saying that investing in multiple assets is like rolling several dice instead of just one—the more you roll, the less likely you are to experience extreme results.
Aimee added that it’s not only about increasing the number of assets in a portfolio; the relationships between those assets matter significantly. “Correlations range from minus one to one,” she explained. “The closer to zero or negative, the stronger the diversification effect.” Low or negative correlations—like those between stocks and bonds—can provide crucial stability during turbulent market periods.
However, the duo did caution that asset correlations can shift over time. For instance, in 2022, the previously negative correlation between equities and bonds flipped to positive, resulting in a tough year for the classic 60/40 portfolio. “It was a record-breaking bad year for the 60/40 strategy,” Aimee noted, underscoring the necessity of alternatives to buffer against such risks.
Beyond Bonds: Exploring Alternatives
The discussion then ventured into the integration of alternatives within broader portfolio strategies, particularly as bonds have become less reliable for diversification. James explained how rising inflation and tightening monetary policy have strained the traditional bond-equity dynamic. “Bonds are still vital to multi-asset portfolios, especially during demand-shock recessions,” he remarked. Yet, rising inflation continues to challenge their protective qualities.
Enter alternatives! Aimee elaborated on how assets like listed infrastructure and real estate investment trusts (REITs) can provide not just diversification, but also a hedge against inflation. “Infrastructure assets, such as utilities and transportation, usually offer more stable cash flows linked to inflation,” she pointed out, making them attractive during inflationary periods. James also mentioned that high-yield bonds and emerging market debt can provide diversification opportunities away from traditional bonds. “We’ve developed a tool we call the ‘correlation galaxy’ to visualize how different asset classes interact,” he noted, emphasizing the hunt for ‘intergalactic stars’—assets with minimal or no correlation to traditional investments.
Thematic Investing and the Rise of Alternative Credit
As the dialogue turned to thematic investing, both managers delved into how capitalizing on long-term structural trends can diversify return profiles within a portfolio. James explained that thematic equities—focusing on specific trends like clean energy and artificial intelligence—are often categorized as alternatives. While they may share short-term correlations with broader equity markets, their long-term performance can diverge significantly.
Aimee also discussed the growing significance of alternative credit within multi-asset strategies, highlighting assets like high-yield bonds and emerging market debt. These assets, typically higher-risk and higher-yield, can enhance portfolio income and diversification. “High-yield bonds have shown stronger correlations with equities than traditional bonds, yet with lower volatility,” she noted. However, she warned that current valuations of alternative credit assets may be inflated, reducing their attractiveness in the near term.
Navigating Active vs. Passive Strategies in Alternatives
A popular question among attendees revolved around LGIM’s approach to balancing active and passive strategies within portfolios, particularly regarding alternatives. James explained that while passive strategies excel in many asset classes, certain areas—like high-yield bonds—demand active management. “In high yield, you’re facing issuers with elevated default risks, making it crucial to have active managers to navigate these waters,” he stated.
Aimee added that active management is equally vital in infrastructure, especially in the realm of ESG (environmental, social, and governance) investing. “In such a diverse universe, an active strategy empowers managers to mitigate risks and select companies aligned with long-term sustainability aspirations,” she affirmed.
The Future is Bright for Alternatives
As the discussion wrapped up, both Aimee and James conveyed a hopeful outlook on the future of alternatives within investment portfolios, especially amid economic uncertainty. Aimee highlighted how many alternative assets possess defensive characteristics, providing a safety net for investors bracing for potential recessions or rising inflation. “Alternatives will continue to play a pivotal role in diversification and downside risk protection,” she asserted.
James echoed this sentiment, acknowledging that while alternatives may pose access and management challenges, their long-term rewards are substantial. “Our dedicated team of strategists and economists keeps us informed on these assets, and for those managers not leveraging alternatives, they risk overlooking significant opportunities,” he cautioned.
In Conclusion
This enlightening webinar showcased how alternative assets can enhance diversification and elevate risk-adjusted returns within multi-asset portfolios. As we face the challenges of traditional bonds and volatile equity markets, alternatives such as infrastructure, REITs, high-yield bonds, and thematic equities emerge as essential tools for financial advisers striving to build resilient portfolios for their clients.
Catch the full conversation by accessing the webinar recording here!
Meet the Experts: James Giblin
James oversees a diverse range of retail multi-asset funds, contributing significantly to LGIM’s Model Portfolio Service (MPS). Before LGIM, he honed his skills at LGT Wealth Management as a portfolio manager. A proud graduate of the University of Nottingham, James is also a CAIA (Chartered Alternative Investment Analyst) charter holder and a CISI Chartered Wealth Manager.
Meet the Experts: Aimee Bowkett
Aimee is a skilled Fund Manager responsible for LGIM’s Model Portfolio Service and is deeply involved in managing Multi-Manager Funds. Since joining LGIM in 2016, she’s made strides from an Investment Specialist to a key player in portfolio management. Prior to LGIM, Aimee was a fixed-income product specialist at AXA Investment Managers.
Discover more about LGIM and their innovative investment strategies!
