Alternative equity strategies can deliver reliable income streams and protect capital in uncertain and volatile markets, and warrant investigation, despite the general lack of investor appetite for equity-based products.
This is one of several key findings from Standard & Poor’s Fund Services’ alternative strategies – equity sector review covering beta variable, market neutral, and market exposure strategies. S&P Fund Services analyst Jason Patton said:
“Against an uncertain background, particularly in Europe, cash remains king. In a relative sense, alternatives are gaining ground in investors’ allocations, but flows to the sector, if any, are tending to favour managed futures and global macro managers; equity in general is not in favour. Still, our view is that some equity alternatives in the Australian market offer smarter exposure to the asset class.”
Some of the key findings from the sector review:
- The flexibility of the formats covered in our review (relaxation of the long-only constraint, freer use of options) allows skilled managers to protect to the downside while targeting reliable income streams, or remaining exposed to eventual upside participation if and when bull market conditions re-emerge. We continue to scrutinise managers’ use of options and of “the short side”.
- Beta variable managers that we perceive to be “sticking to their knitting” are rated highly—they use the short portfolio strictly defensively, if that is their heritage and skill set. Our review shows that the best managers are displaying a record of delivering downside protection, alternative income streams, and/or non-correlated sources of return that help to better diversify investors’ portfolios in a highly uncertain market.
- We continue to be impressed with equity income as a peer group, finding it to be under-appreciated as a potential core allocation for income-focused investors.
- Some Australian equities-based market-neutral trading strategies continue to punch above their weight as genuine absolute return “alternatives”. These strategies show alpha and, importantly, non-correlation, while avoiding significant draw-downs in negative equity environments and realising the portfolio diversification potential of the format.
19 July 2012