Portfolios are made up of two things: equities and everything else.
Bundling together some decent companies, large and small, from around the world is the easy bit – but how should allocators organise their non-equity bucket?
Well, one research doc has landed in our inbox which suggests investors should forget everything they thought they knew about bonds, and instead allocate 50 per cent of their portfolio to alternative assets.
AQR, an investment management firm known for its forays into...erm...alts, has released a new academic paper arguing in favour of dropping bonds almost entirely from multi-asset strategies.
“Over longer horizons, T-Bills are exposed to the risk that real or nominal interest rates fall, the present value of future needs rises and the investor cannot meet that increase,” they wrote.
Instead, they posited that being more open-minded with strategic asset allocation can yield decent results from a portfolio of around 40 per cent equities, 40 per cent liquid alternatives, 10 per cent fixed income and 10 per cent illiquid assets.
The paper takes issue with the purist adherance to model portfolio theory, and instead encourages portfolio managers to learn three lessons from MPT: firstly, diversify by risk rather than dollars (or pounds), secondly, tilt towards higher return-per-unit-of-risk assets as well as assets less correlated to others in your portfolio, and thirdly, real-world allocation decisions are largely driven by beliefs and constraints.
Indeed most DFMs provide advisers with a pretty conventional set of portfolios, with roughly 15 per cent when combining liquid and illiquid alts. AQR rebuts this by...quoting John Maynard Keynes: “it is often better for reputation to fail conventionally than to succeed unconventionally.”
But Asset Allocator has come across one or two portfolios that have taken a leaf from AQR’s book, including a product from the folks at Shard Capital.
Their MPS, which aims to launch on platform by the end of the year, comprises one quarter each in equities, fixed income, managed futures plus commodities, and gold plus Tips.
Part of the reason behind splitting into quarters was manager Ernst Knacke’s belief that bonds do not provide adequate protection against inflation, while saving his active budget to spend on commodity trading advisers.
We’d need to see some actual performance figures to adequately judge an alts-heavy portfolio in the real world, and we’re mindful of the pitfalls.
AQR acknowledged that uncertainties, aversion to complexity, unconventionality, high fees and illiquidity were all factors which had caused investors to go easy on alt strategies.
Until perceptions change, or until uncorrelated strategies do as they’re told, we imagine that we’re quite a way off from the 50 per cent alternatives portfolio.
