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Eight wealth managers on their favourite alternative funds

Our readers name eight funds pursuing investment opportunities in ways that go beyond traditional strategies

Simon Evan-Cook

Senior investment manager, Premier Asset Management, London

We have plenty of favoured alternative funds. For example, Man GLG UK Absolute Value, which has done a fantastic job since we bought it at its launch in June last year.

It’s a long/short fund with a low-to-neutral net position. This means that, in theory (and so far practice), it does not require rising equity markets to make a positive return.

We focus on picking talented managers running processes that allow repeatable outperformance. So, from our perspective, this type of alpha-focused fund makes a great deal of sense, particularly at a time when traditional diversifying assets look expensive.

We backed the manager, Jack Barrat, because we knew him well from holding a successful long-only fund he co-manages. That fund’s process centres on identifying undervalued companies, and its returns suggest the process is repeatable.

We took the leap of faith into its long/short launch, because we believed, intuitively, that process could be extended to short selling by (very roughly) shorting the opposite situations to the ones they’d normally buy in the long-only fund.

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Simon Evan-Cook

Senior investment manager, Premier Asset Management, London

We have plenty of favoured alternative funds. For example, Man GLG UK Absolute Value, which has done a fantastic job since we bought it at its launch in June last year.

It’s a long/short fund with a low-to-neutral net position. This means that, in theory (and so far practice), it does not require rising equity markets to make a positive return.

We focus on picking talented managers running processes that allow repeatable outperformance. So, from our perspective, this type of alpha-focused fund makes a great deal of sense, particularly at a time when traditional diversifying assets look expensive.

We backed the manager, Jack Barrat, because we knew him well from holding a successful long-only fund he co-manages. That fund’s process centres on identifying undervalued companies, and its returns suggest the process is repeatable.

We took the leap of faith into its long/short launch, because we believed, intuitively, that process could be extended to short selling by (very roughly) shorting the opposite situations to the ones they’d normally buy in the long-only fund.

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Ryan Hughes

Head of active portfolios, AJ Bell, London 

With the UK economy facing a clear challenge from Brexit over the next few months, my preferred alternative fund is the Janus Henderson UK Absolute Return.

Fund managers Ben Wallace and Luke Newman are a very experienced duo and have managed the fund for many years and seen all kind of market environments.

The fund is predominately UK large-cap focused, although the investment remit was extended to allow exposure to overseas equities of up to 40%, up from 20%.

The mandate has significant flexibility, with the allowable net exposure ranging from negative 30% to positive 75%, although the net position is purely a result of the opportunity set from both longs and shorts, resulting from their bottom-up stock selection process.

With the UK market quite possibly entering a period of heightened volatility, the flexibility in this strategy could prove invaluable. With a demonstrable track record of navigating challenging markets, this fund is a firm favourite.

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Will Dobbs

Investment manager, Charles Stanley, London

Although not adverse to the asset class, we have struggled to find alternatives that genuinely add value to our portfolios. However, this was not the case with the IPO of Tritax Eurobox.

The real estate investment trust is investing in the structurally undersupplied continental European logistics market. Warehousing for European logistics is in the midst of a major long-term structural increase, driven by the growth of e-commerce, technological advancements and the drive for supply chain optimisation.

Economic growth in Europe is also starting to improve. The UK has seen growth in this area over the past five years, and given Europe is behind on the growth curve in terms of e-commerce, we believe this is a good entry point.

The trust should provide capital growth opportunities, as well as income.

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Alex Brandreth

Deputy CIO, Brown Shipley, Manchester

My favourite alternative fund is the Merian Global Equity Absolute Return fund (GEAR). This is an equity market neutral strategy based on a highly quantitative model blending five stock factors with market sentiment and volatility to create a portfolio of around 800 stocks.

The market neutral nature keeps the correlation to risk assets, particularly global equity, very low, while historically growing at an annualised rate of 5.9% since launch. This ticks two key boxes for a good alternative: proven diversification and a competitive growth rate.

Too often, the choice in this part of the portfolio seems to be one or the other, and the natural bias to avoid losses means returns are regularly sacrificed in favour of untested 'portfolio insurance'.  Despite going through a tricky period more recently, this has historically been a good buying opportunity.

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Freddy Colquhoun

Investment director, JM Finn, London

Currently, my preferred alternative investment is the Capital Gearing Trust managed by the well regarded Peter Spiller and Alastair Laing at CG Asset Management.

The £270 million investment trust seeks to preserve capital while generating strong risk-adjusted returns over the longer term. The managers seek to add value both through stock selection and asset allocation. The current asset allocation is broadly divided between risk assets (40%), short duration fixed income (30%) and inflation-linked bonds (30%).

Within risk assets, equities represent only 14%, investing via closed-ended vehicles, with property, infrastructure, loans and private equity making up the difference. The trust operates a zero discount policy and, at their discretion, can issue new shares via a tap issue.

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Andrew Rees

Investment manager, EQ Investors, London

I have been adding to my positions in the Dunn WMA Institutional Ucits fund at the moment. This purely systematic trend-following fund tracks momentum across several different asset classes, including currencies, fixed income, equities and commodities.

Dunn are constantly looking to improve the overall risk return profile of the fund by adding additional markets and asset classes if they prove to be beneficial.

The fund also does not charge a management fee and instead takes a performance fee of 20% with a high watermark, ensuring that investors and management interests are aligned.

Finally, the fund updates its investors on its net positioning by asset class to ensure investors understand our exposure. The fund returned 7.5% for the year ending 31 August.

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James Rowbury

Investment research coordinator, Redmayne Bentley, Leeds

With inflation at 2.7% and interest rates enduring historic lows, real returns on investments are straining. Fixed income yields are becoming negligible and equity prices across most developed equity markets remain relatively expensive; cyclically adjusted price-to-earning ratios on the S&P 500 are at levels reached only three times in the last 40 years. To this end, alternative investments are in vogue and the variety of return sources is ever growing.

My favourite area of alternatives is those with asset-backed securities. Specifically, I feel International Public Partnerships (INPP), is well-placed to capitalise in the rising inflationary environment. They have a diversified portfolio of assets held globally across energy, transport, housing and healthcare, with a bias towards the UK.

The assets held all have predictable cash flows from the public sector and are inflation-linked. The fund has returned over 148% (8.1% per annum) to shareholders since its IPO in 2006, and has an attractive income yield of over 4.5%.

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Arjun Pandya

Investment analyst, Cumberland Place, London

H2O MultiReturns has been held in client portfolios for nearly four years and remains one of our core alternative funds.

It is a global macro fund with similar return targets to some of the well-known competitors, yet its investment approach and alpha drivers are very different. It invests for the long term, is very contrarian and is willing to back its views with sizeable positions. This does mean the fund can exhibit equity-like volatility, so be warned!  

This contrarian nature, coupled with the majority of alpha historically being derived from currency and bonds, has meant that the strategy has a very low correlation to other asset classes and the peer group in general, thus making for a great alternative when it comes to portfolio construction.

Given there is no performance fee, we consider it a very cost-effective option, especially when factoring in the level of return and overall diversification benefit gained from the holding.

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