Alternative reality – Even a three-year outlook is no real basis for sound investment decisions


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

This is an exciting time to be heavily involved in mezzanine finance and other kinds of specialist finance markets such as high-yield – or so we learned recently from a presentation by Intermediate Capital Group (ICG), a listed company that is heavily involved in mezzanine finance and other kinds of specialist finance markets such as high-yield.

The business views the current environment as “highly supportive of higher-yielding strategies” and estimates global asset managers’ allocations to alternative investments – which to its way of thinking very much includes high-yield – will rise from 12% of the current $70 trillion (£45 trillion) of total assets under management to 15% of whatever the presumably bigger number will be by 2020.

Underpinning this estimate is a survey in which ICG asked asset managers across a range of different categories – corporate pension funds, insurance companies, endowments/foundations and public pension funds – whether they were inclined to increase, maintain or decrease their allocation to alternative assets over the course of the next three years.

According to the survey, the percentage of the four different investor categories that planned to raise their allocation to alternatives over the next three years ranged from 51% (corporate pension funds) to 63% (endowments/foundations). With the percentages of those holding things steady in the range of 23% to 31%, that leaves those looking to decrease their allocation very much in the minority.

Given the collective eyebrow The Value Perspective has raised in articles such as High and dry and Balancing lacked with regard to high-yielding strategies not being that terribly high-yielding any more – and perhaps not sufficiently so to compensate investors for the associated risks – it is interesting to see this is the way such a large portion of the market is apparently minded to behave.

It will be even more interesting to see whether, three years from now, things have played out as all these asset managers seem to expect or whether one or more elements of the investment equation – the interest rate environment, risk appetite and so forth – have changed so that they no longer feel quite so confident about the prospects of (so-called) higher-yielding strategies.

Long term investors like endowments and pension funds do need a strategic asset allocation policy that matches their investment objectives. But the point of such a framework is that it doesn’t change much over time and imposes some discipline on investors to not get carried away when a particular asset class does very well or very badly.

The current stance of these investors towards mezzanine and high yield may seem very logical to them today based on the way these assets have performed in recent years. But, as The Value Perspective is inclined to warn on a year-round basis – though it seems especially pertinent to do so amid the current seasonal outpouring of economic, market and investment forecasts – the temptation to increase allocations to assets that have performed strongly, at the expense of those that haven’t, is one that is best resisted.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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