alternative asset classes for your overall portfolio
*This content is brought to you by Overberg Asset Management
By Nick Downing*
Where do you invest if you are looking for lower volatility and higher income returns than stock markets? The traditional answer is government bonds. Not anymore, at least in the medium term. Bonds are not fulfilling their traditional role as balanced portfolio risk diversifiers. Most government bonds such as US Treasuries, German Bunds and UK Gilts have become overpriced. They are trading at deeply negative real yields, which is a bad starting point for investors. This means that inflation-adjusted losses are guaranteed. Add to that the Fed’s most aggressive rate hike cycle in over 40 years and unprecedented quantitative tightening, and the outlook for bond investors doesn’t look good. There is already carnage in even the least risky bond markets. The iShares International Treasury Bond ETF has lost 16.57% year-to-date (as of 15e August). This is even worse than the 12.29% drop in the MSCI World Index.
The balanced 60/40 portfolio allocation between stocks and bonds is being turned upside down. The main culprit is inflation, which has upset the steady downward trajectory of bond yields for 40 years. As bond yields fall, bond prices rise. Now that bond yields are rising alongside rising inflation and tighter monetary policy, bond prices are falling. This trend could persist. We recommend a reduction in the portfolio’s balanced bond weightings. Instead, investors should look to alternative asset classes. Like bonds, these alternative asset classes tend to offer lower volatility than stocks and higher income yields, so they are effective at mitigating risk. They have the added benefit of scoring high on the ESG scorecard and providing direct coverage against rising inflation, public enemy #1. 1 in today’s global financial markets.
We will briefly discuss 6 alternative asset classes and the investment vehicle of choice to access them. They are all listed on the London Stock Exchange and are part of OAM’s privately managed global balanced equity portfolios.
RENEWABLES: Greencoat UK Wind is the largest listed renewable energy investment company in the UK with a market capitalization of around £2.5 billion and is part of the FTSE 250 index. The company invests in onshore and offshore wind farms in the UK. The business model is in an ideal position, benefiting from global decarbonisation, with rising inflation suited to the company’s inflation-linked power contracts. Electricity prices in the UK have risen sharply alongside soaring oil, coal and gas prices. The stock price is up 13.59% year-to-date, excluding the additional annual dividend yield of 5%.
INFRASTRUCTURE: The IMF and World Bank have repeatedly stated that a key driver of global GDP growth in the coming years will be infrastructure spending, a theme that should benefit 3i Infrastructure. Its investments, focused on the United Kingdom and Europe, are oriented towards energy transition, public services, transport and communications. Investments aim to generate long-term return and capital growth. The results have been impressive with an annualized total shareholder return of 13.1% since going public in 2007. The company has a portfolio of 18 assets valued at £3.2 billion. Earnings have an explicit link to inflation. Essential services have real pricing power. The stock trades with a dividend yield of 3%.
PRIVATE CAPITAL: HG Capital is widely recognized as one of the best managed private equity investment firms listed on the London Stock Exchange. HG Capital has recorded annualized net asset value growth of 17.8% over the past decade and 15.6% over the past 20 years. The focus is on technology and technology services companies involved in tax and accounting, enterprise resource planning, healthcare, legal and regulatory compliance, wealth management, automation and engineering, and insurance. They are profitable businesses with high levels of recurring revenue. The exhibition covers the United States, Europe and the United Kingdom. Private equity tends to be less volatile than listed equity investments. HG Capital’s net asset value is expected to fluctuate less than stock indices. The stock is trading at a 13.9% discount to net asset value, the true value for an investment of this caliber.
MUSIC ROYALTIES: Hipgnosis Songs, listed in July 2018, acquired 146 music catalogs from songwriters and publishers in a relatively short time, comprising more than 60,000 songs. Hipgnosis provides shareholders with music royalty revenue through various performance platforms, including concerts, radio, streaming, movies, games, advertising, CDs and other media. Streaming services are becoming increasingly popular, growing at an annualized rate of nearly 30%, and the share of music royalties coming from streaming is increasing. The US Copyright Royalty Board imposed an 11% to 15% increase in songwriters/publishers’ share of music royalties from US streaming. Music consumption has no correlation with economic cycles, providing investors with protection against economic cycles. The stock trades at a dividend yield of 4.5% and a 23.8% discount to net asset value, offering substantial value.
SECURE LOANS: Biopharma Credit, listed in 2017, is considered one of the best sources of quality alternative income in the universe of investment companies. The company specializes in senior debt guaranteed by products approved and marketed in the biotechnology sector. The biotech industry is expected to have significant capital needs over the next few years as the number of products in clinical trials continues to grow. The potential benefit of returns beyond regular interest payments may come from loan prepayment charges. Most of the debt is floating rate debt, which will benefit shareholders as interest rates continue to rise. The stock trades on a dividend yield of 7.3%.
ABSOLUTE RETURN: BH Macro is the only way for investors to access the award-winning Brevan Howard Master Fund, one of the world’s leading absolute return macro investment vehicles. BH Macro offers protection against market disruptions, rewarding investors in times of increasing financial market volatility. It provides a solid counterweight to any wallet. Managers limit losses by buying rather than writing options structures, which tend to be out of the money and therefore very cheap. BH Macro’s track record is exceptional, producing an annualized net asset value return of 9.33% (GBP) since listing in 2007. Since then, positive monthly returns have been produced over the course of 17 of the 20 worst months for the S&P 500 index. European sovereign debt in 2011. As markets corrected in 2018 due to rising US interest rates and quantitative tightening, BH Macro gained 12.43%, and when Covid hit in 2020, investors were rewarded with a return of 28.09%. During the year to the end of June, BH Macro has already increased its net asset value per share by 14.11%.
A portfolio evenly split between these 6 alternative asset classes at the start of the year would have gained 2.48% (GBP) in 15e August. This excludes the dividend yield of 3.48%. Additionally, at current prices, the portfolio is trading at a 3.56% discount to NAV. Overberg Asset Management specializes in truly diversified individual global equity portfolios and, through prudent asset allocation, we have achieved a 20-year track record of outperformance against our benchmarks, particularly during the market turbulence. market. Let us help you diversify your global portfolio the smart way.
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- All opinions of the editors are their own and do not constitute investment recommendations or financial advice. It is essential to speak with a qualified wealth management and investment professional before making any financial decisions.
- Overberg Asset Management (Pty) Ltd. is an approved financial services provider: 783′
*Nick Downing, Research and Analytics, Director, Overberg Asset Management.
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