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Private clients advised to increase investment in alternatives

Investec Wealth & Investment (IW&I) has raised its allocation to alternative investments, specifically hedge funds, absolute return funds and defensive structured products, in a bid to ensure a balanced portfolio.

IW&I believes less correlated investments will provide a greater opportunity for outperformance over the next 18 months.
IW&I’s Asset Allocation Committee (AAC) has recommended raising the allocation to alternatives by 2%, at the same time as decreasing exposure to index-linked gilts and cash by 1% each. The switch was driven by the belief that these alternative investments can be sensible options for reducing portfolio volatility when the more conventional options (in fixed income) become excessively expensive.  IW&I has just over GBP25 billion under management in the UK, meaning the move equates to an increase of approximately GBP500 million in client funds into alternatives.
In reaching this decision, the AAC noted its belief that stagflation is less probable than deflation, reducing the appeal of index-linked assets.  The AAC also noted the attractiveness of converting the zero return option of cash into higher expected yielding absolute return targeting strategies and its judgement that less correlated markets may provide greater opportunity for these strategies and the greater availability of fund options in this area.
Chris Hills, Chief Investment Officer at IW&I, says: “Alternatives have become increasingly attractive compared to other options offering ‘insurance protection’ in client portfolios. Despite a choppy start to the year, our risk outlook remains unchanged.  We believe that reflation is the most likely outcome over our investment time horizon as opposed to deflation or stagflation.
“Notwithstanding, we believe that risk assets remain attractively priced relative to ‘insurance’ assets such as fixed income – even more so than last year, since equities rose only alongside earnings but bond yields fell sharply and the health of the corporate sector that supports those risk assets is strong.  Once Europe’s near-term political issues are put to rest, economic growth is expected to become more broadly based and earnings are anticipated to grow solidly.”

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