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10 wealth managers reveal their top alternative funds

From venture capital trusts and government bonds to renewable energy and music copyrights, our readers tell us what their favourite alternative investment is at the moment.

Thomas Watts

Investment analyst, Cumberland Place, London

Commercial property 

‘With conventional, open-ended commercial property funds still reeling from the violent price swings and prolonged lock-in periods that characterised them in the aftermath of the Brexit referendum, we prefer an alternative form of exposure.

'Commercial property is one of the most sensitive sectors to a negative Brexit outcome; we therefore prefer to gain our exposure from the income stream bricks and mortar produces rather than changes in capital values.

'The Time Commercial Freehold fund invests in long-lease properties, with around a third of its portfolio in high quality ground rents that do not directly participate in property price movements.

'Providing a secure and stable income for clients, the fund offers a strong alternative to traditional property exposure, while at the same time exhibiting a similar return profile of steady capital uplifts and a decent yield.’ 

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Thomas Watts

Investment analyst, Cumberland Place, London

Commercial property 

‘With conventional, open-ended commercial property funds still reeling from the violent price swings and prolonged lock-in periods that characterised them in the aftermath of the Brexit referendum, we prefer an alternative form of exposure.

'Commercial property is one of the most sensitive sectors to a negative Brexit outcome; we therefore prefer to gain our exposure from the income stream bricks and mortar produces rather than changes in capital values.

'The Time Commercial Freehold fund invests in long-lease properties, with around a third of its portfolio in high quality ground rents that do not directly participate in property price movements.

'Providing a secure and stable income for clients, the fund offers a strong alternative to traditional property exposure, while at the same time exhibiting a similar return profile of steady capital uplifts and a decent yield.’ 

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Fred Mahon

Fund manager, JM Finn, London

Capital Gearing 

‘My definition of an alternative investment is one that offers low correlation to equities and bonds, low volatility, and a reasonable long-term return. This sounds too good to be true, and, in honesty, it often is.

'The three funds that I invest in for this purpose are Capital Gearing trust, Personal Assets trust and the Latitude Horizon fund.

'Notwithstanding the fact that past performance isn’t an indicator of future performance, all of these funds are multi-asset and have a strong track record, particularly in difficult markets.

'During 2018, all three of these alternative funds outperformed equity markets considerably, with Capital Gearing the best of the bunch, as shares rose 2% over the year.

'On this basis, Capital Gearing ranks as my current favourite alternative, but I have been adding to all of these funds over recent months, and I am confident in their managers, Peter Spiller, Sebastian Lyon and Freddie Lait.’

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Jonathan Baker

Branch manager, Charles Stanley, Leeds

Environmental infrastructure 

'One of my favourite "alternatives" at the moment is the John Laing Environment Assets, which invests in a diversified portfolio of operational environmental infrastructure projects generating predictable and stable revenue.

#Environmental infrastructure encompasses projects that utilise natural or waste resources and support more environmentally-friendly approaches to economic activity.

'This involves the generation of renewable energy (including solar, wind, hydropower, anaerobic digestion and biomass technologies), the supply and treatment of water, the treatment and processing of waste, and projects that promote energy efficiency.

'Importantly, from an investment perspective, these projects benefit from long-term, predictable, inflation-linked cash flows supported by long-term government-backed contracts as part of the government’s commitment to low-carbon electricity.

'Also, the reliable income streams generated by the underlying projects pays a quarterly dividend, that increases progressively in line with the cost of living, and is currently above 5.5%.'

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Jessica Milsom

Senior associate, investment strategy & research, Stonehage Fleming, London

Long short managers 

'During this late-cycle environment, we’ve sought to strengthen our Long Short allocation by favouring managers with a clear sense of the business and credit cycle that flows through to security selection.

'The Lomas team utilize a pragmatic approach, not fixed in any one valuation framework, allowing them to adapt to different regimes. While they have certainly benefitted historically from growth leaning exposures, in 2018 they sought to de-emphasize higher multiple growth businesses and build a portfolio with more insulated risks, which has played out well.

'While they have exposure to some well-understood growth themes, this is now balanced against less crowded and original ideas. It’s unusual to find a strategy within a Ucits framework with such stability in a team and process – the Lomas team have been together for c. 16 years.

'A Cayman version, which launched in 2012, has annualised returns of 8.2% and volatility of 5.6%.'

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Ryan Hughes

Head of active portfolios, AJ Bell, London

H20 Multi Returns 

'The definition of "alternative" means different things to different people. I’m not a huge fan of many of the niche investments that have emerged over the past few years, as they haven’t really been tested in a sharp equity downturn, and liquidity has not been tested.

'Instead, I prefer the more traditional strategies, and therefore my preferred alternative manager is the H2O Multi Returns fund, which takes a global macro approach. 

'It has a hugely experienced team, having been formed out of Amundi, who, importantly, are very comfortable backing their conviction.

'While this means there may be some punchy positions in their portfolio, their courage of convictions is a key part of their investment process.

'They keep the investment approach fairly straight forward in focusing mainly on fixed interest and currencies with a major element of returns coming from relative value. While the performance profile is lumpy, this is a very interesting addition to a portfolio.'

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Gordon McAndrew

Senior investment director, Investec Wealth & Invest, Edinburgh

Infrastructure funds 

'The perfect alternative investment has proved somewhat elusive for investors looking to diversify risk in a traditional portfolio.

'One investment that comes very close to ticking all the boxes (visible cashflows, some degree of inflation protection, limited correlation with traditional assets) is infrastructure.

'There are a number of infrastructure funds available to investors of all types, ranging from fairly large and diverse strategies with interests across the spectrum of infrastructure assets, to smaller more niche funds investing in very specific assets such as wind farms. The one aspect common to most is the predictability and consistency of returns over time.

'We invest in a range of different infrastructure assets in portfolios, although given their popularity, most tend to trade at a premium to their underlying net asset value. To help mitigate this, we aim to take advantage of any fund raising in the sector, which usually allows access at a small discount to the prevailing market price.'

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James Beck

Partner and portfolio manager, James Hambro & Partners, London

Convertible bonds 

'I think convertible bonds look really interesting. This is a specialist niche market that has been overlooked since 2008, when it has been relatively easy to make money from equities and bonds.

'Convertible bonds can offer the security associated with bonds during difficult markets, but with potential equity upside in a benign environment. They are also long volatility, one of the very few areas of the market that is historically cheap. Given current uncertainty and the late stage of the cycle, this combination of characteristics looks very attractive.

'We have focussed on convertible arbitrage funds. Despite the well-publicised losses of 2008, the longer-term record looks compelling. Between 1993 and 2012, the Hennessee Convertible Arbitrage index delivered annualised returns of 7.9% versus the S&P 500’s 8.2%, but at a fraction of the volatility. With central banks engaged in monetary tightening, there should be great opportunities for active managers.'

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Jean-Paul Jaegers

Head of investment strategy, Barclays Investment Solutions, London

VCTs 

‘A great alternative asset for investors may be venture capital trusts. In a well-diversified multi-asset portfolio, venture capital can act as a source of returns that is not directly linked to quoted large-cap stocks, but rather to small expanding companies based on the latest innovation (eg fintech).

'Venture capital investment tends to be riskier as survivorship rates are lower than those for well-established companies. However, this essentially means there is a sizeable risk premium to be gained for taking on the start-up risk for small expanding companies. Most venture capital trusts have 30-50 names in their portfolio, which diversifies some of the inherent risks.

'The UK has one of the most generous tax incentives for venture capital investors. Investors are entitled to a range of significant tax benefits, including an income tax rebate of 30% of the amount invested (if the investment is held for at least five years). In addition, any dividends and capital gains are tax-free for the investor.’ 

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Paul Derrien

Investment director, Canaccord Genuity Wealth Management, London

Perfect blend 

'Alternative investments is an all-encompassing term for a broad church of investment strategies, with vastly different risk profiles and vastly different outcomes.

For example, alternatives could be metals, cars, wine, cryptocurrencies, properties, art, stamps – in simple terms, something that is not stocks, bonds or cash.

'However, for clients who are looking for assets to add diversification to their portfolios of more traditional asset classes, these are often sensible but difficult to access.

'No matter how much I like wine (yes, as an investment, too), it does not fit with the average client portfolio. So there is a need to source other investments with little or no correlation to stocks and bonds wherever possible.

'Within client portfolios, we are currently significantly underweight bonds and have reallocated these funds to alternatives, so our aim is to generate a return greater than that available from bonds, as well as deliver a counterbalance to our equity risk.

'There is no one solution to this, so we blend several investments to achieve this. These are infrastructure funds, structured notes, absolute return equity funds and fixed income funds.

'Wine might be fine. But we prefer it in a glass, not a portfolio.'

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Cormac Nevin

Investment analyst, Beaufort Investment, London

Multi asset 

‘One of our favourite alternative investments is Sanlam’s Multi-Strategy fund, which is very much a hidden gem.

Run by Mike Pinggera since 2013, it aims to participate in rising markets, while protecting capital during market reversals. It has delivered great risk-adjusted returns over the past five years and is a solid risk diversifier within portfolios.

'It is comprised of systematic and discretionary components, investing in a broad array of stock indices, government and high yield debt, real assets (everything from property to renewable energy to music copyrights), and equity derivatives. The team employ stringent risk analytics and stop-losses to tightly control downside risk.

'Some of the most valuable attributes of the strategy include the ability for the systematic component to rapidly re-enter the market for liquid risk-seeking assets after a market sell-off, as well as the diversity of the fund’s return sources. The fund provides a return profile that you don’t see every day, backed by a tried and tested track record.’ 

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