Liquid alternatives and dynamic asset allocation in the late cycle

Martin Crabb
Martin Crabb
Shaw Chief Investment Officer
As we enter the 10th year of US economic expansion, and the 27th year of Australian expansion, portfolios need to be positioned for the inevitable 'late cycle' which sees rising inflation, rising interest rates, eventually slowing economic growth and lower asset prices.

We are already seeing evidence of this through lower house prices in Australia and lower share prices around the world. In times like these, portfolios need shock absorbers - air-bags, if you like.

Cash is clearly not a desirable investment option given 1.5% interest rates, but debt securities and hybrids hold greater appeal due to the higher yields and the opportunity that active management of these asset classes can bring. But is there another way?

Most large institutional investors are tackling this late cycle issue by reducing portfolio equity weightings in favour of “alternative investments”. These large investors can access direct assets and often lock their money up for several years in illiquid structures, and structure deals that may provide significant diversification benefits, but are just not suitable for individual investors.

Shaw and Partners have worked with some of Australia’s leading investment managers to develop a liquid Liquid Alternatives Portfolio which combines a number of uncorrelated strategies into a portfolio that is designed to diversify the source of return away from shares and fixed income. We have replaced some of the strategic weighting to share markets to add this component across our balanced and growth portfolios.

Further, we are dynamically weighting asset classes in response to fluctuation prices, taking advantage of opportunities to improve the risk/return composition of portfolios. Recently, we reduced our overweight to international shares back to a neutral position as we head into an uncommonly uncertain period spanning Brexit vote, Italian budget, a Fed rate decision, tariff deadlines, the G20 summit, Trump/Xi trade talks and an OPEC meeting all within a six week period.

The sell-off in Australian shares has brought more attractive value in that asset class so we have used weakness to add positions, taking us back to neutral against our long term asset allocation.


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