Multi-asset managers are eying up alternative assets such as specialist property, commodities and music royalties, as they look to both protect against inflation rises and assets uncorrelated to equities.
At the same time, Fund Calibre’s elite-rated multi-asset managers, revealed they are less keen on Chinese equities, emerging market debt (EMD) and infrastructure.
“With inflation rising, linkage and consistency is key and with bonds challenged to deliver, alternatives such as Home Reit can meet the need with solid rent generation over long-term leases,” said Richard Parfect, co-manager of the VT Momentum Diversified Income fund, explaining the case for specialist property.
Based on the expectation that inflation fears will remain elevated in the first half of this year, and maybe longer if a more virulent stain of Covid were to materialise, David Coombs, manager of the Rathbone Strategic Growth Portfolio, made the case for commodities.
“In order to mitigate to mitigate both inflation and geopolitical risk, we think an exposure to more economically-sensitive commodities makes sense, industrial metals, energy and agricultural,” he said.
In terms of finding assets that are genuinely uncorrelated to equities, Matt Stanesby, co-manager of the Close Managed Income fund, said having first invested in music royalties in 2000, the end added to its holding last year.
“This gives us access to an income stream from more than 150,000 songs, across all music genres, and with new areas like streaming or placement in films and commercials, potential for capital upside too,” he said. “One of the big benefits of this area is that it is genuinely uncorrelated to market movements,” he added.
Better ways to achieve return
Despite the theory of infrastructure being appealing, in that it provides an income driven return with low equity sensitivity, John Stopford, manager of the Ninety One Global Income Opportunities fund, is less convinced.
“Their performance during the big market drawdowns of the last 10 years has shown the asset class’ fragility, caused by concentrated holdings registers, reduced liquidity and underlying exposures with greater economic sensitivity as public-private partnerships have dried up,” he said.
“We think there are better ways to achieve the desired return profile.”
Having had concerns about Chinese equities for some time, the Jupiter Merlin Income fund meanwhile has reduced its exposure to the world’s second largest economy.
Amanda Sillars, co-manager of the Jupiter Merlin Income fund, said: “As their communist ideology has firmed, we now believe that the interests of minority investors in Chinese companies are well down the pecking order for the State and, by extension, companies which have to adhere to their rules
“Partners who prioritise transparency, clarity and shared goals are best sought elsewhere.”
Staying in emerging markets, Coombs said EMD forms part of Rathbones’ equity risk allocation.
He argued: “Following the recent sell-off in higher growth areas of the US equity market, we prefer to use our risk budget to take advantage of this volatility, which should provide superior returns to those we can see from EMD in a rising US interest rate environment.”