Facing an investment dilemma

Low interest rates and high equity market valuations are posing an investment strategy dilemma. Alternative investments reduce the overall risk of a portfolio and contribute to better performance. The alternative asset management industry is on the verge of a transformation, and is set to become increasingly significant.

Doggedly low interest rates and highly volatile equity markets present a difficult environment for investors. Against this backdrop, the focus often centres too strongly on absolute performance in the short term. By contrast, institutional investors have a medium to long-term horizon, and are steadily and consistently expanding their investment universes with the addition of alternative investments. The alternative asset management sector as a whole is also about to embark on a major transformation, driven primarily by the financing of pension schemes.

These were the key issues addressed at the media conference held by the SFAMA AIC (Swiss Funds & Asset Management Association) in Zurich on May 30. In his opening remarks, SFAMA managing director Markus Fuchs looked at the characteristics of traditional and non-traditional investments, as well as the historical trend – with 2008 being the turning point where fundamental changes took hold for alternative investments as well.

“All asset classes are subject to market forces, have beta drivers, and are thus in particular dependent on the interest rate trend, albeit to differing degrees,” he said. “Attention should be centered on questions regarding the risks the investors are willing or able to take on, as well as the returns that are to be generated over the long term.”

Hans-Jörg Baumann, chairman of the SFAMA AIC and chairman and senior partner at Swiss Capital Alternative Investments AG, highlighted where the challenges in the current market environment lie, and how alternative returns can be achieved.

“As an investment style, private market investments – such as private debt, private equity, and hedge funds – have made significant gains in terms of their importance in the USD 300 trillion global investment universe, and have together clearly passed the USD 10 trillion mark,” he said. “The market share of alternative investments and their role within strategic asset allocations will continue to grow. In this context, clients will also increasingly be seeking specialists with appropriate expertise – and Swiss asset managers rank among the leading market participants worldwide.”

Robert Mellor, partner at PricewaterhouseCoopers LLP UK and co-author of PwC’s report Asset Management 2020, A Brave New World, went on to address the transformation of the alternative asset management industry in the offing over the coming years. “The need for higher and sustained investment returns has increasingly pushed the alternative asset management sector to the fore in recent years,” he explained. “Depending on the scenario, the assets under management in this segment will reach between US$ 13,600 billion and $ 15,300 billion by 2020.”

Pius Fritschi, managing partner at LGT Capital Partners AG, spoke about alternative investments in the context of a portfolio, showing that they add value. In addition to this, they reduce the overall risk and can be implemented efficiently. “Liquid alternative investments contribute to the necessary diversification, while private market investments can be used to bolster returns,” he said.