Evercore Pan Asset

It’s easy to be bearish. Government bonds are still on low yields in the advanced world. People expect interest rates to go up sometime. There is plenty to worry about with the high levels of debt and borrowing.

The banks have been made to buy large quantities of these government bonds. They are still in many cases nursing uncomfortable loans to property investors, and are busy trying to cut the amount of lending in relation to their capital. Advanced world shares have recovered much of the loss in 2008-9, but still show disappointing rates of return for the last decade.

It is driving more investors to ask if alternative investments are a bigger part of the answer. If quoted shares have been poor and bonds are looking dear, would we be better off in more private equity, hedge funds and commodities? Are there alternative asset classes which generate better returns on a reliable basis? Are there management styles and types of asset which can smooth out some of the ups and downs of the Stock market to the benefit of their holders?

Alternative asset classes are not a magic answer to the problems of poor performance on conventional portfolios. Many hedge funds fell in 2008 despite all the arguments that they were not correlated with volatile stock markets. Commodities are volatile in price like shares, and they too did badly as the Credit Crunch bit. Private equity is a way to add gearing and concentrated financial management to conventional equity. In bad times private equity falls in price as well.

You need to ask the same questions about alternative investments as about bonds and shares. Are they cheap? Are they well managed? Can I get out of them easily if I change my mind? How bad could the losses be if things go wrong?

During the collapse of 2008-9 it was difficult getting out of private equity if you wanted to. These investments are medium term commitments, with little liquidity if things get tough. If business generally turns down, more highly geared businesses financed by debt will suffer more, as interest costs take a bigger proportion of revenues. Commodities do not provide an investor with an income. Indeed, if you hold the underlying commodities there are costs in renting storage and insuring the asset. If you are holding through options and futures there are management costs in buying and selling the right bits of paper. Commodity investment is more liquid than private equity or hedge funds, but in difficult times some commodity funds may impose charges or delay on investors wishing to head for the exit. Hedge funds during the poor period did sometimes prevent investors selling at advertised dealing dates, or had to impose substantial discounts for those keen to leave.

There is a lot to be said for asking questions about two important characteristics of investment. What are the costs of management? How liquid is my investment? Large long term funds can afford to tie up capital in specialist funds, in private equity and the like. Smaller funds, and funds with needs to pay pensions or charitable donations out of the portfolio may prefer to invest in a more liquid way. That is why we have developed alternative investment for charities and pension funds using traded ETFs. There are ETFs which can provide you with exposure to commodities, private equity and even hedge funds in a more liquid form. Your investment is in an ETF which trades all the time the Stock market is open.

We also think property is an interesting asset class. It did very badly in the west in the crash of 2008-9. There remains some overhang of unsold properties in the USA and UK, and a bigger one in Ireland and Spain. However, there is a price for everything and growing evidence of good recovery in central London. There are more liquid ways of investing in property through ETFs which buy index tracking holdings in Real estate Investment Trusts that can provide good diversification for a charity or pension fund.