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Alternatives gain favour amid over-valued equities

Aberdeen Standard is the second biggest asset manager in Europe

Gulf News

Dubai: A cautious approach to over-valued equities is triggering more money into alternative investments, according to the second-biggest European money manager.

Aberdeen Standard Investments, which manages £600 billion (Dh3.06 trillion) of assets, has increased its exposure in alternatives — like property markets, infrastructure projects, insurance-linked securities or aircraft leasing — to nearly 35-40 per cent from the earlier 30 per cent.

“With equity valuations being stretched and bonds yields at very low level, we are finding attractive opportunities in alternative asset classes away from the traditional investments,” Mike Brooks, head of the Multi-Asset team from Aberdeen Standard Investments, told Gulf News.

“We generally see this having a potential to give higher returns, and less co-relation with mainstream asset classes. We want equity-like returns, with significantly lower volatility and risks and with different drivers,” Brooks said.

Record-breaking run

The Dow Jones Industrial Average hit a peak of more than 26,000 while the Nasdaq index has managed to climb more than 7,000. The benchmark Sensex index in Mumbai also stayed above the 35,000-mark and it is such a record run that has made fund managers cautious.

The asset management firm has reduced its allocation in equities to 20 per cent, from the earlier 25 per cent, and sold off part of its bond holdings because of lower yields, while it added the local currency Emerging Markets bonds to its exposure.

Aberdeen Standard has a cautious view on equities, and expects subdued returns in the next five years amid “a correction at some point.”

“We don’t see an obvious catalyst on why there may be a sell-off. Most investors are nervous about valuation in equities, but they still continue to invest because they can’t see any other opportunity, as long as they don’t see a reason why equities would start to see a sell-off,” he said.

The risks to these markets are higher than expected inflation and more rate hikes from the US Federal Reserve.

“If any of these risks come to the fore, then there is [a] much further [range] for equities markets to fall. There is a concern, but we are not predicting that correction would happen in the next 6-12 months,” Brooks said, adding “we could see an end of the easy market period, which has fuelled investment returns in recent years, [thus] triggering a bigger sell off.”

However, the asset manager is relatively well diversified, so that would keep the downside limited in case of a sell-off.

Smart beta approach

In equities, the asset manager uses a “smart beta-like approach.”

“Where we have apppetite for stocks with attractive valuations, high quality companies and factors that we think will produce positive returns. This is designed in a way with low volatility than global equity index. That’s the best way to reducing that risk return trade off that our clients are looking for in all our portfolio,” Brooks said.

Locally, Aberdeen Standard manages £15-20 billion of clients money in the Gulf region, and most of institutional clients are interested in real estate investments in Europe and alternatives.

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