Alternative Funds have Failed to Perform

It is not surprising that alternative asset funds failed to keep up with equity market returns during a strong bull run, says Morningstar analyst Randal Goldsmith

Randal Goldsmith 22 January, 2018 | 8:05AM
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Standard Life's GARS fund is the most well known alternative assets fund

Alternative strategy funds delivered better performance in 2017 than the previous year – but returns are disappointing against a background of strong equity market returns. However, it is not surprising that they failed to keep up with equity market returns during a strong bull run. These funds are designed to have low correlation to equity markets and invested in to bring diversification to investors’ portfolios.

Looking at longer-term performance, negative interest rates during the past 12 months have been a headwind for alternative strategies that often make significant use of derivatives backed by collateral deposit. That deposit incurs a cost when interest rates are negative versus being a source of return when they are meaningfully positive.

Which Funds Have Delivered?

One fund that stands out for its exceptional performance is JPM Global Macro Opportunities. After a difficult 2016, the managers of this fund switched from a theme of lower for longer growth and inflation to a view of cyclical recovery. In keeping with this, they have shifted the portfolio away from alts strategies to traditional assets, with a bias to cyclical equities and removing all government bonds, pushing up beta to over 60%.

Additionally, during the year they have become more positive on Asia and emerging markets led by China, and have introduced a new theme about the growing use of technology, which has been a strong driver of returns, helped also by the managers’ stock selection here.

The managers of Insight Broad Opportunities also aim to manage the portfolio’s beta through its mix of alts and traditional assets, and have generally benefited from having a bit more of the latter, also based on a view of continued cyclical recovery.

Based on the story told by fund flows – a continued shift into multi-asset alternatives – investors generally seem to have looked through disappointing returns in 2016 from alternative strategies and the better returns on offer from equities during the past 12 months.

SLI’s GARS, which has a Morningstar Bronze Analyst Rating, has been an exception, with outflows from the middle of 2016. Very disappointing performance in 2016 might have been a factor, but there are other issues including capacity management. That said, outflows have reduced our concern on capacity and performance has recovered this year.         

A version of this article appeared in PWM magazine

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
ASSII-Gb AbRt Str D Acc EUR12.75 EUR0.34Rating
Insight Broad Opportunities B1 EUR1.35 EUR0.51Rating
JPM Global Macro Opportunities C Net Acc1.71 GBP-0.12Rating

About Author

Randal Goldsmith  is a Manager Research Analyst with Morningstar.