Opportunities in Alternatives

Celia: With nascent financial disintermediation and a small but growing Asian private credit market, there is a significant gap in the demand and supply of credit. Furthermore, the growing opportunity set in tandem with Asia’s economic growth reiterates the investment case for the asset class. Overall, with low competition between private lenders, yield premiums remain attractive and loans are heavily covenanted with high margins of safety through low starting loan-to-values.

We continue to see a robust opportunity set in India and China, particularly for growth capital and stressed refinancing. In India, the credit gap is broadening and with banking system non-performing loans rising further leading to scalable opportunity in performing private credit and distressed opportunities. In China, the focus on deleveraging and onshore defaults will lead to further gaps in the credit availability for small and medium enterprises, real estate sector across growth capital as well as stress refinancing situation.

Mark: Due to policymaker errors, the post financial crisis era was marked by low growth, low inflation and central bank dominance, an environment that proved very supportive for financial assets. In this falling yield and low volatility world, economic outcomes were poor as central bank liquidity flowed directly into financial assets. 

As the global economy recovers from the pandemic, the policymaking landscape has dramatically changed with fiscal spending unlikely to disappear anytime soon as inequality and global warming issues are addressed.  Central banks will remain supportive but take more of a backseat, while ensuring that banking systems are in good health to support the recovery. 

This reflationary environment will be better for the global economy and worse for fixed income markets. Higher growth and inflation will see yields rise and so a more “absolute return” approach will be needed to achieve positive returns in fixed income space. The ability to take short positions either outright or for relative value investments will be required and the flexibility to invest across the fixed income universe to find return sources essential.

Craig: The global pandemic caused an extreme monetary response by central banks and governments around the world which in turn has created extreme market behaviour. This has resulted in $18trn of negative yielding bonds (as at November 2020) and massive gains in global equities. As we have started to see some countries “unlock” with mass vaccination the consumer is being allowed to spend for the first time in a year. Therefore, investors are now hoping and expecting that an expensive equity market continues to deliver consistent, positive returns for their entire portfolio of which 40-60% in bonds is doing little or nothing.

Inflation may rise, although given that there are still many lockdowns, people being infected and more unemployment than before the start of the pandemic, it is likely to be regional and transitory for some time.

Increasingly, we are seeing much being written in the financial media about diversifying modern investment portfolios away from traditional 60-40 equity / bond portfolio asset allocations. We can see this happening in real time with the evolution of cryptocurrencies and the growth of the hedge fund and wider alternative investment management industry.

John: The ultra-low interest rate environment that investors have faced for a prolonged period of time now is structurally altering investment strategies. In particular, it has pushed investors to incur higher risk in search for returns, but also have upended the traditional role high quality bonds used to play as means of diversification and protection. In this context, gold has increasingly gained acceptance among a wider set of investors – from individuals to institutions. For example, investors tend to use gold as a diversifier, as well as tail-risk and inflation. The low interest rate environment has reduced the opportunity cost of holding gold as a strategic asset.

Celia: In an income-starved world, Asian private credit provides attractive risk-adjusted returns with risk premia over and above the developed markets and conventional strategies in the liquid credit space. The staggering growth of the Asian private credit market also allows the strategy to deploy capital alongside a strong deal pipeline. Furthermore, Asian private credit brings diversification benefits from a global perspective as economic and credit cycles continue to diverge.

Mark: The team uses top-down fundamental research to identify the macro-economic environment to provide a framework for their core strategy. However, the team believes a sole fundamental approach to investing is not enough to outperform in modern financial markets. They also engage in bottom-up macro analysis as markets themselves can impact economic fundamentals and be key drivers of the broader asset classes. This has been critical to outperformance in recent years. The interplay between the team’s top-down and bottom-up macro analysis determines portfolio strategy.

This strategy is used to construct a portfolio that has appropriate characteristics in terms of its duration, yield curve, credit, country and currency exposure.  The fund utilises a full derivative overlay, and so can achieve positive returns in a rising yield environment. The process is looking to achieve diversified returns across the fixed income and currency spectrum not relying on any one specific area of the market. This creates a fund that is high quality, liquid and has low exposure to credit markets. The fund has no benchmark and so is continuously reinvented in its entirety to fit the up-coming macro environment and achieve its positive return objectives.  

Craig: Our private credit strategies have operated for many years in different economic climates. They are not correlated to traditional public bond and equity markets although they are highly complementary to fixed income.

Our strategies have often delivered consistent, positive returns while operating with low volatility and Prestige Funds tend not to operate with performance fees or leverage.

Our combined team of fund management and specialist finance professionals have many years of experience. We operate in niche areas where there are high barriers to entry and a high level of specialist knowledge is required.

John: Gold stands out as an effective diversifier, helping investors capture some of the upside as economies recover, but most importantly protecting the downside. This behaviour is underpinned by gold’s dual nature: both as an investment and as a consumer good. In fact, more than 40% of net annual gold demand is linked to primarily jewellery and electronics, and thus positively linked to economic expansion. Conversely, investment demand-which also accounts for more than 40% of net annual demand tends to be countercyclical and protect portfolios in periods of economic uncertainty.