ASI seeks income through basket of alts

Asset Class in Focus

A collection of “unorthodox asset classes” could be one way to squeeze out a sustainable income stream, argues Aberdeen Standard Investments.

Mike Brooks, Aberdeen Standard Investments

“Finding value and earning sustainable returns among traditional asset classes is a challenge,” according to Mike Brooks, Aberdeen Standard Investments’ head of diversified multi-assets.

“Developed market government and corporate investment grade bond yields have been falling for three decades. Equities have enjoyed a long bull run which has stretched valuations, and growth prospects are limited despite the rally in markets since the start of the year,” he told FSA on a recent visit to Hong Kong from his Edinburgh base.

Brooks was in Asia to promote Aberdeen Standard’s $205m diversified income fund.

It has an eclectic portfolio that includes heavy weightings to local currency emerging market debt, asset-backed securities, Reits and UK investment trusts focused on infrastructure, energy renewables and special situations. It also includes allocations to esoteric sectors such as aircraft leasing and healthcare royalties to enhance the fund’s income stream.

“It is a genuinely diversified fund that aims to identify and take advantage of what some people might consider unorthodox asset classes,” said Brooks.

The fund’s main objective is to earn income, and its one-year historic yield is 4.6%. It will need to find ways of boosting income in the wake of last year’s US interest rate hikes in order to match its benchmark of 1-month US libor plus 5%.

Seeking EM yield

Hence, its emerging market bond allocation is the highest since the fund’s lunch in June 2015. Exposure is predominantly to Latin America, where yields are generally higher than in Asia – although it also has holdings of Indonesia and Malaysia domestic debt.

Other multi-asset managers, such as M&G agree that developed market fixed income securities offer scant value and prefer emerging market bonds. Pictet Wealth has a similar view.

Brooks insists that the 8.5% yield generated by the emerging market bond holdings is not at the expense of significant capital deterioration due to any currency weakness.

“The foreign exchange rate is generally supportive, and even with some depreciation the allocation still earns at least 6% return,” he said.

The fund’s annualised volatility of 4.2% compares favourably with the 6.88% average volatility of the international mixed asset category.

However, the arcane nature of the some its investments – such as healthcare royalties and aircraft leasing might confuse retail investors more familiar with the cash flows provided by conventional equity and fixed interest securities.

Yet, Brooks believes the novelty as well as the predictability of the cash flows of the fund’s alternative assets will be appealing when they are understood by investors.

“The fund’s diversified holdings smooth returns over time and offer a real difference to traditional asset classes,” said Brooks.


Fund Asset Allocation:

Asset class

% weighting

Emerging market bonds

27.8

Listed equity

20.6

Asset-backed securities

13.2

Special opportunities

11.2

Infrastructure

8.8

Property

8.0

Absolute return

3.9

Insurance-linked

1.5

Cash

4.9

Source: Aberdeen Standard Investments (31 Jan 2019)

 

Aberdeen Standard SICAV Diversified Income Fund vs benchmark and sector average

Source: FE Analytics. Three-year cumulative performance in US dollars.

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