A tilting strategy "from beta to alpha” is expected to help institutional investors address the low returns coming from traditional investments.
“Often institutional clients have liabilities to cover, such as a promise on the amount of returns they have to achieve," New York-based Anderson told FSA on a recent trip to Asia. "What we have seen recently is that it is hard to achieve these targets."
Anderson said the current market situation is “not a normal period”. It is characterised by low yield and high volatilty, with a lot of geopolitical influence on the investment environment as well.
“We also have an incredible expansionary period. Central banks have pumped money into the system. The market has priced in the timing of that situation and there is a lot of pressure on fiduciaries to find alpha,” Anderson said.
No more easy returns
Atlanta-based Jeffrey Schutes, senior partner at the firm, pointed out that central banks across the globe have been stimulating the market over the last five-to-six years and it has been easy to create pure beta and get decent returns, following the notable gains in the S&P 500 Index, the Dow Jones Industrial Average, and some Asian indices.
However, in the last six-to-nine months, it has been very difficult to get beta, or the easy return, so investors have to look for other ways to meet their return targets, Schutes said.
“It’s not only the equity market becoming more volatile and more difficult, but the bond market and fixed income are also difficult. There are no yields, and in some cases they are negative yields.”
He suggested investors could find alpha by adding more exposure to alternatives such as private equity, infrastructure and real estate.
The core-satellite strategy could be a good example to diversify portfolios, Schutes said.
“We would develop beta as a core strategy with a rate of return at a certain period of time we build into our model. For example, if you have ETF, it could be your core strategy. When you want to add alpha around that, you can add satellites. The satellites could be a variety of things, they could be smart beta,” he said.
In terms of risks this year, Schutes said further devaluation of China's currency, or a collapse of Brazil's economy, or a Brexit, could disrupt the market and clients are very sensitive to these issues.
“Things we are concerned about we hope are not going to create another global financial crisis. We have more control [than in 2008], but we have got [more] geopolitical issues."