The hunt for income in a low interest rate world is a recurring topic. Liquid alternatives have been one possible solution and as a result have grown popular in the US market. Several firms, OMGI and Franklin Templeton among them, believe there is a strong demand for liquid alts in Asia.
Liquid alts funds contain the alternative assets that have traditionally only been sold to professional investors — institutions and high net worth individuals. However, liquid alts are now open to retail investors in major markets. They promise reasonable yield, controlled volatility and diversification.
Liquid alts are not without criticism. They have relatively complex structures and strategies. They are often similar to hedge funds, but they have no lockup periods. That means the various assets in the portfolio, which can include leveraged products such as loans or derivatives, can be sold off quickly, leading to unexpected steep losses for investors.
Against this backdrop, Luke Ng, senior vice president of research at FE Advisory Asia, provides a comparative analysis of the JPM Global Macro Opportunities Fund and the Invesco Global Targeted Returns Fund.
Investment Strategy
Both funds are a type of liquid alternative with the euro as their base currency and a global macro strategy, Ng explained.
The JPM product aims for 6-9% annualised volatility and a 7% over cash annualised return for investors over the medium term (medium term refers to a rolling three-year period).
Invesco’s fund, on the other hand, targets a 5% over cash annualised return in the medium term with volatility kept at half or below the volatility of global equities, Ng said.
Both JPM and Invesco pursue a similar investment process to achieve their return and volatility targets. They pledge to maintain daily liquidity using various liquid asset classes such as equities, fixed income, currencies and derivatives to construct their portfolios.
“For JPM, the team begins by identifying key global macro themes that tend to benefit from global economic development, and then they define investment strategies that fit into any one or more of those macro themes identified.
“These strategies could be directional, market neutral and relative value play, and they spin across different styles, regions and asset classes,” Ng said.
He explained that the strategies are currently driven by eight themes: supply side weakness, China in transition, emerging markets rebalancing, global policy divergence, Japanese economic recovery, Europe gradual growth recovery, low inflation and US economic strength.
Ng gives an example of how JPM turns macro themes into strategies: By taking advantage of the low inflation environment, the team shorts European energy equities as low oil prices reduce their earnings and ability to pay dividends. They are also long Australian government bonds due to higher yield and quality relative to other G10 countries.
Luke Ng, senior VP of research at FE Analytics
Turning to the Invesco fund, “in relative terms, the process seems to be less dominated by big macro trends, but the team attempts to exploit various investment ideas that tend to benefit from different economic environments or from market inefficiencies”.
Similar to the JPM fund, Invesco’s ideas can be directional, market neutral and relative value play, and they also spin across different styles, regions and asset classes, Ng said.
“For instance, one of the ideas takes advantage of the upward slope of the commodity forward curve by going long longer-term forward contracts and by shorting those in shorter term contracts.
“There are also directional bets, such as long German equities due to high quality, broad exposure to global demand and the weak euro versus the US dollar.
“Overall, both JPM and Invesco construct their portfolios by combining around 30 of these standalone strategies and ideas together, with no single strategy representing a dominant position in the portfolio.”
The strategies are diversified in order to bring down the overall volatility of the funds to their respective targets.
Both fund managers pay strong attention to the overall risk management of the funds. “But JPM tends to deal with the standalone risk of their strategies through the use of derivatives by dynamic-hedging in order to protect the portfolio from adverse outcomes of known events,” Ng said.
Performance
Over a rolling three-year period, Ng assessed both funds using euros as the currency.
The JPM fund managed to meet its three-year return target of 7% plus cash, with annualised volatility maintained at around 8%, Ng said.
The Invesco fund, launched in December 2013, has slightly less than a three-year track record. However, as of August 2016, annualised volatility throughout the period was around 3.96%, less than half of the MSCI World (12.38%), Ng said. Annualised return was around 3.7%, slightly short of the targeted return.
“Overall, both funds are delivering risk/return profiles similar to their objectives,” he said.
“Something that is worthwhile to note is that both funds managed to maintain a low correlation with other major asset classes including global equities, fixed income and cash.”
