Alternatives offer best downside protection over next 10 years – Smith & Williamson MPS

Alternatives will offer investors the most effective downside protection over the next 10 years, according to Smith & Williamson Investment Management’s Managed Portfolio Service (MPS).

Historically, fixed income allocations have formed the basis of investors’ protection against market falls, but going forward alternatives will do a better job of diversifying portfolios and mitigating risk, according to James Burns, co-manager of Smith & Williamson’s Investment Management MPS.

“What’s going to protect your portfolio in the next ten years? It’s not going to be what protected it 20 years ago, because bonds now offer you minimal protection,” he says.

“We are overweight index-linked bonds because we are of the view that if you are going to hold fixed income, it should be linkers, such as the ASI Global Inflation-Linked Bond Fund. But otherwise bonds are going to offer you negligible portfolio protection and investors will be better served looking elsewhere.”

The team has been using alternatives to provide diversification and protection in its more defensive portfolios, where it is overweight versus the benchmark*, and will look to allocate further to the asset class in the next 18 months.

“Strategies such as the Neuberger Berman Uncorrelated Strategies Fund and Picton Property Income REIT are the type of diversifiers that help protect portfolios and that’s why we hold them,” says Burns.

He adds that alternatives that return 4-5pc a year are perfectly adequate for many portfolios, despite carrying what appear optically high fees.

“It’s tempting, in a post-MiFID world, for clients to focus heavily on costs,” he says. “But lots of alternative strategies such as hedge funds or property REITs pay for themselves in what they offer in returns and diversification.

“For defensive portfolios seeking to protect against the downside, we think that alternatives are – and will remain for years to come– the best way to protect capital.”

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*The Defensive Portfolio has a 11.23% weighting to alternatives versus 5% for the benchmark (the S&W Defensive benchmark and Dynamic Planner 3 benchmark)