Time to read: 3 min
For almost a decade, we have witnessed a historic bull market characterized by high equity returns, low volatility and low interest rates. In my opinion, it seemed like most investors believed all that was needed to be successful was to pile into equities and not worry about diversification (or anything else, for that matter). Frequent readers of my blogs know I have been cautioning investors to prepare for lower equity returns, increased volatility and rising interest rates. I’d like to share three recent news stories that share a similar view of the markets. Given the increasing prevalence of this view, investors may wish to consider alternative investments.
“Low returns going forward for a long time”
Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, predicted at a recent Bloomberg conference that “we will have low returns going forward for a long time.”1 Dalio said that current valuation levels are elevated, and the ability to “squeeze” returns from risk assets would be increasingly constrained as quantitative easing comes to an end and interest rates rise.
As investors ponder how to prepare for a low return environment, one option would be to consider alternative investments that invest opportunistically on a long and short basis across multiple asset classes. These investments may also help reduce volatility while potentially providing diversification benefits to a portfolio. Specifically, I believe global macro, multi-alternative, long/short equity and market neutral funds may be useful in such an environment. I’d also suggest considering senior loan funds (also known as floating rate or bank loan funds) in order to potentially take advantage of rising interest rates.
Invesco Macro Allocation Strategy Fund (GMSDX) and Invesco Global Targeted Returns Fund (GLTAX) are examples of global macro funds. Invesco All Cap Market Neutral Fund (CPNAX), and Invesco Long/Short Equity Fund (LSQAX) are examples of multi-alternative, market neutral and long/short equity funds, respectively. Finally, Invesco Floating Rate Fund (AFRAX) is an example of a floating rate fund.
Negative returns in the forecast for 2018
A story in The Wall Street Journal quoted Deutsche Bank as stating that 90% of asset classes, including stocks, bonds and commodities, are on track to post negative returns for 2018.2 This would beat the previous high of 84% way back in 1920, and would be a stark wake-up call after 2017, when only 1% of asset classes delivered negative returns.2 Traditionally, investors have turned to bonds as a cushion during periods of equity decline. But it seems increasingly plausible that bonds could suffer as well given the current low level of interest rates and the ongoing unwinding of quantitative easing.
Therefore, investors may wish to seek investments with the potential to generate positive returns during periods when stocks and bonds are falling simultaneously. Investors may consider global macro, multi-alternative and market neutral funds.
Could commodities come back in 2019?
Goldman Sachs recently predicted that commodities will rebound from a difficult 2018. In fact, they are calling for a rally of 17% in 2019.3 If such a rally were to occur, it would present investors with an opportunity to generate attractive returns in what could be a challenging return environment overall. Another potential benefit to commodities is some tend to appreciate during inflationary environments.
That said, commodities are often underrepresented in portfolios. Investors can gain direct exposure to commodities through alternative investment funds that specialize in this asset class. Invesco Balanced-Risk Commodity Fund (BRCAX) is an example of such a fund.
Of course, I must also mention Invesco’s Chief Global Market Strategist Kristina Hooper, whose 2019 market outlook specifically discusses the potential benefits alternatives may provide next year: “… US asset markets are prone to mean revert over the course of this unusual cycle, with downside risks stemming from trade tensions and geopolitics,” she wrote. “… perhaps most important during this period of uncertainty, we believe that exposure to alternative investments can help with diversification and risk mitigation.”
In closing, I’d like to reinforce a point I have made many times in the past. I believe the most common mistake investors make with alternatives is they invest on a reactive, rear-view mirror basis — only jumping in following a period in which they would have benefitted from a position. For this reason, I suggest investors proactively consider an allocation to alternatives in the near term in anticipation of a more challenging environment going forward. Please consult with your financial advisor about your specific goals and tolerance for risk.
To learn more about Invesco and its alternative capabilities please visit our website at www.invesco.com/alternatives.
1 Source: Bloomberg L.P., “Bridgewater’s Dalio sees low returns on assets in the long term,” Shelly Hagan, Nov. 19, 2018
2 Source: Wall Street Journal, “No refuge for investors as 2018 rout sends stocks, bonds oil lower,” Akane Otani and Michael Wursthorn, Nov. 27, 2018
3 Source: Bloomberg L.P., “Goldman predicts commodities will soar in 2019,” Ranjeetha Pakiam, Nov. 26, 2018
Blog header image: katjen/Shutterstock.com
Long positions are buying a security with the expectation that it will increase in value.
Short positions/short selling is the sale of a security not owned by the seller, then buying later. The belief is that security prices will decline and the price paid to buy it back at will be lower than the price it was sold.
Long/short strategies (equity or credit) typically take both long and short positions to benefit from rising prices on the long side and declining prices on the short side.
Diversification does not guarantee a profit or eliminate the risk of loss.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
Alternative investments can be less liquid and more volatile than traditional investments such as stocks and bonds, and often lack longer-term track records.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
Most senior loans are made to corporations with below-investment grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.
Alternatives Investment Strategist
As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.
Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.
Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.