March 2017

SPONSORED FEATURE: Alternative thinking

Portfolio Manager Davide Cataldo discusses the results of the Pioneer Investments’ survey on liquid alternatives and how investors can be encouraged to increase their allocation.

Diminishing returns from traditional asset classes have encouraged investors to look further afield in their allocations, including liquid alternatives. However, there is still some hesitation among investors to fully embrace this area. Funds Europe surveyed 70 readers to find out why*.

What is beyond dispute is that investors are mostly concerned about returns and drawdowns. As understandable as this is, in our view the greatest concern should be the permanent impairment of capital, says Davide Cataldo, Head of Absolute Return Multi-Strategy.

“It is possible to ride out volatility and drawdown if you have the stomach for it and a long enough time horizon. But investors can get nervous and pull out prematurely.”

The survey shows that the majority of investors have allocated no more than 10% of their portfolio in liquid alternatives. While this might be a slight increase on previous years’ allocations, there are still few willing to invest 20% or more.

According to Pioneer Investments’ internal research, an allocation closer to 20% can help improve the risk/return profile of a traditional asset mix.** “Perhaps investors need to set their minds to a bigger allocation, one that we believe could produce better risk-adjusted returns.”

It is a challenging conundrum for the advocates of liquid alternatives – to persuade the cautious that they may get better returns from a bigger allocation.

Two-thirds of the survey’s respondents cited mandate guidelines and a lack of clarity over how to deploy the strategies as their major constraints for allocating more to liquid alternatives.

This, says Cataldo, is in part due to the heterogeneous nature of the liquid alternative tag. Liquid alternatives cover a huge breadth and this makes it difficult for investors to decide from which traditional asset class they should increase their allocation to this diverse asset class.

Ultimately these choices depend on individual investors’ circumstances and, in this regard, increased diversification and reduced correlation with equities and bonds should be seen as benefits.

There are also issues over mandate guidelines. In the traditional investment world, mandates are relatively straightforward. Most equity mandates involve beating a benchmark, but in an unconstrained liquid alternatives world, there are no benchmarks. It will take time for some investors to recognise the benefits of this change, says Cataldo.

“Having an unconstrained approach is a new way of thinking – using cash as the benchmark. It is not about relative performance – there is no point beating the benchmark but having a negative return. It is not about relative performance but absolute returns.”

In order to persuade cautious investors to make the leap of faith in to higher allocations of liquid alternative strategies, fund managers will have to challenge their investors’ thinking and promote the benefits of the asset class.

But the educative efforts will also have to be supported by delivering consistent returns over time, says Cataldo. “It will come down to who generates alpha and who doesn’t. It is harder to generate alpha without a benchmark, but it separates the good from the bad.”

Disclaimer: Unless otherwise stated all information and views expressed are those of Pioneer Investments as at 16 February 2017. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected.

The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority.  Details about the extent of our regulation by the Financial Conduct Authority (“FCA”) are available from us on request.

Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.

©2017 funds europe