Consider the alternative
The last 12 months have highlighted the need for portfolio diversification to include a significant exposure to alternative assets and strategies, according to Select Asset Management chief investment officer Dominic McCormick.
McCormick stressed that while it made sense to always have a portion of an investment portfolio allocated to alternatives, the commonly-held allocation of 5 per cent may not be sufficient, as it is unlikely to produce any meaningful risk return benefits for the overall portfolio.
An ideal weighting, in Select’s view, would be between 10 to 25 per cent.
“There definitely is a growing recognition [among financial advisers] in this [market] environment, but it should be for the long term, not just in downward markets,” McCormick said.
“The risk in the current environment is people will bail out of conventional assets and into cash, but this means they won’t be in a good position [when markets go back up] to get out of cash and back into traditional or alternative investments.
“So the benefit of diversification is you don’t have to worry about that timing.”
For investors adding alternative investments to their portfolios for the first time, Select recommends those with mainstream growth portfolios reduce their exposure to equities to make room for the new asset class.
Similarly, a more defensive mainstream portfolio should reduce its high exposure to fixed interest when adding alternative investments, thus reducing the associated interest rate risk.
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