DUBAI: Are tumultuous financial markets giving you sleepless nights? Last year was unusual for markets, and this year has been volatile. There was noise on various fronts be it trade war or protectionism, rising populism in Europe, issues around North Korea’s nukes or the endless Brexit negotiations, or the trajectory of interest rates.
In all, US equities — which peaked in early 2018 — had a rough year amid massive bouts of volatility. The US equity indices ended up witnessing the worst performance since the financial crisis in 2008.
So if an investor in the US stock markets sitting on good returns at the start of 2018 went on a holiday and came back in early 2019, he would end up losing 7.3 per cent, resulting in wealth depletion. And for diversification, if an investor had money in bonds, you would have been in a dire situation. In 2018, bonds, along with equities, gave negative returns for a second time in three decades, indicating a breakdown in traditional diversification pattern. At one point in time, holding cash seemed to be a profitable option.
The outlook for markets is muddier than ever. In the shadow of a possible recession in the United States, a slowdown in global economy, record high government debt, or rising inflation, some analysts are pointing out that the stock market rally may be on its last legs.
Investors are looking at non-correlated assets, which has little or no link with the mainstream assets such as equities, bonds or commodities. They may be looking at fixed maturity plans, and private equity, which has shown negative co-relation with traditional asset classes.
We ask the experts on the possible options.
What’s an investor to do?
Fixed maturity portfolios (FMP) could be a viable alternative, Nisarg Trivedi, director at Schroders, told Gulf News. FMPs are strategies that invest in a wide range of bonds with a defined term. These funds attempt to provide investors with an experience similar to that of buying an individual bond: principal is invested, regular distributions are made, and then principal is returned at fund wind up. There is no guarantee that 100 per cent of principal will be returned at the end of the fund, of course, but a portfolio managed by a professional manager can help to avoid poor credits.
What are the benefits?
The benefits for investors include: Simplicity — these portfolios have defined terms and aim to reach a target yield. Declining volatility — because these portfolios march towards maturity each day the level of volatility is actually expected to decrease as time goes on.
Potential to lock in higher yields — with global growth slowing and the markets expecting interest rate cuts, it could be a good time to lock in yields, Trivedi said.
Who invests in private equity?
Investors use alternatives in a portfolio to satisfy different objectives. “We see investors implementing alternative strategies to enhance returns, provide diversification or generate current yield,” Trivedi said.
Private equity continues to represent a considerable proportion of family office investments, and with hedge funds and real estate having slowed this year, over 40 per cent of family offices are expected to increase their allocations towards impact and environmental, social and corporate governance (ESG), making education, health care and environmental conservation popular investment destinations as they seek investments with low risk with high returns, according to Abhishek Sharma, CEO of Foundation Holdings.
According to the UBS Global Family Office Report, family office portfolios have bounced back to an average return of 7 per cent in 2016 and even higher equity returns in 2017 and 2018, but in the hunt for yield, many family offices have been turning to more illiquid and low-risk investments.
So, what’s the most compelling argument to invest in PE?
PE is able to generate higher returns than the public market through the illiquidity premium and the complexity premium. The illiquidity premium, provided by the private equity fund structure, gives owners the ability create value over the long term without the reporting pressures of the public market. The complexity premium speaks to the large universe of PE funds, and resource needed to successfully invest in the asset class.
“Creating a successful private equity portfolio can be difficult and it is important to go with an experienced investor. Schroder Adveq sees the most value investing with specialist managers focused on lesser served parts of the market. As a global investor with local investment teams Schroder Adveq is able to find the most interesting segments of the market by region,” Trivedi said,