Partner Insight: "Mitigating risk and hedging against inflation…"

What should the asset allocation of an alternatives fund in today's environment look like?

Jon: I think the key message for low-mid risk investors is diversification when it comes to alternatives. The huge diversity of choice available means that by investing in a broad basket of alternatives you can avoid a concentrated exposure to just one risk factor. For example social infrastructure and asset leasing tend to behave quite differently in terms of return profiles.

Avni: In 2018 we entered later cycle dynamics and experienced an increase in volatility. We expect volatility will continue in 2019. Within the alternative asset class specifically, during this part of the market cycle, an increased allocation to market neutral/low beta strategies, inflation linked strategies or gold should help in periods of drawdown. However echoing the

point Jon made this should be within a diversified portfolio of alternatives.

Do you think diversification cushions investors against market volatility?

Avni: Yes, we're expecting market volatility to continue and sub-asset classes like asset leasing, specialist property, gold, anything with low beta sensitivity, could help cushion investors against this.

Jon: Renewable infrastructure is another sub-asset class that has performed well. Lots of the underlying subsidies are linked to inflation; things like wind farms and solar energy. These

subsidiaries tend not to get impacted by what's happening in the equity and bond markets. When we screen and select investments in the alternatives space, one of our key criteria is

the correlation and how strong that relationship is to equities or bonds. There is a massive range of opportunities out there for UK investors. You've got maybe 2,500 alternative funds to choose from so it's a challenge to get the right mix.

What is the Architas Diversified Real Assets Fund designed to do?

Avni: It has been designed to provide diversification to a more traditional portfolio, through the use of asset classes with a low correlation to the equity and fixed income market. It also has the potential to provide some level of inflation protection and some steady income.

Jon: The fund also gives a diversified exposure to a range of liquid alternatives. That gives you a low correlation, or low sensitivity, to what's going on in bonds and equities. On top of the capital return, you've got a steady income of circa 3 to 3.5% each year. And then lastly, especially for those people in retirement, it's that inflation protection element.

What sort of diversification benefits do alternatives provide to the Architas Diversified Real Assets portfolio?

Jon: In terms of the output, the overall portfolio volatility is nice and low. So, if you're going to put a figure on that, since our fund was launched, it's just under 3.5% on an annualised basis. That might be a third of the volatility of the equity market, something like that, so it's designed for that steady eddy return. It's not going to be up 15%-20% each year, but it's a portfolio that will aim to give you long-term steady returns against a backdrop and an environment where things are a lot more uncertain. Trade deals with the US and China, the global slowdown; we've seen some massive movements either way in the markets. So not all investors want to have exposure to that. They want to have something which is what we'd call a volatility dampener.

Click here to learn more about the opportunities as well as the challenges involved in selecting alternative assets