Given the falls we have seen in equities and bonds this year, it comes as no surprise that investors are increasingly looking to so-called alternative assets as a means to diversify their portfolios.
The problem is that the “alternative” label is a very broad one. As way of example, controversially in my household one of the best performing assets over the past few years has been … wait for it … Hermès handbags. As long as you don’t get drunk and spill wine on them, if you keep these bags intact, they can offer a real inflation hedge.
The problem is that as multi-asset managers, owing to rules and regulations, we can only go so far; namely we cannot put handbags into our portfolios. Instead, we must use something a little more pedestrian, and this leads us to property and infrastructure.
Both property and infrastructure are one of the few areas that still have cross-party government support, and most countries accept their infrastructure needs a refurb, not least the US.
Just this Sunday (26/06/2022), The White House also announced plans to raise $200 billion for solar projects in Angola, an undersea telecommunications cable linking the Far East with France via Egypt, and nuclear power production in Romania as part of a huge $600 billion G7 infrastructure plan designed to compete with China’s massive Belt and Road initiative.
Here in the UK, the government has identified how important infrastructure is to leveling up and tackling the cost of living crisis longer-term through the delivery of new domestic energy generation capacity, as well as transport improvement projects such as Crossrail and the first new nuclear plant to open in the country in more than 20 years, Hinkley Point C.
Of course, there remains the obvious headwinds for property. Businesses are still trying to get their heads around how much office space they will need as people continue to work from home, and it will be interesting to see how this plays out. Meanwhile, a lot of retail property remains below the waterline, and it is hard to see people going back to department stores and malls as they did before, instead preferring the safety and comfort of online shopping, a trend that had already begun well before the pandemic.
However, we are also prepared to admit that we have called property wrong in the past, and with hindsight, we can observe that we went too far underweight too early. To put this decision into a slightly more positive light, we did, at least, maintain a small property weighting, as well as increase our infrastructure holdings.
IBOSS Portfolio Allocation
One of the reasons our Core portfolios had a more challenging time in 2021, was that we expected the central banks to notice inflation was an issue earlier than they did. In fact, it took them until the end of November 2021, so we made some allocation moves early. As we all know, the difference between being early and wrong in terms of the outcome can be the same.
As we stand today, the model portfolios currently have a combined 6% weighting in property and infrastructure, which has helped us diversify over the last six-to-eight months. It is our view that inflation will continue to make real assets (precious metals, commodities, real estate, land, equipment, and natural resources) good sources of diversification from bonds and stocks, and with this in mind we do expect to maintain this exposure.
However, at the same time it is important to note there is a big difference in the make-up of the underlying funds in their respective peer groups, so this is not just a case of buying the index. For example, within infrastructure we currently hold two very different funds – L&G Global Infrastructure Index and Lazard Global Listed Infrastructure Equity.
In summary, the same tailwinds which have driven every asset upwards for several years are now headwinds, and this will mean change in mindset and the need for greater diversification from just equities and bonds.
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