An alternative perspective

ALTERNATIVES

5 POINT SUMMARY OF THIS ARTICLE

1

2

3

4

5

Low correlation can protect during volatile periods

Private markets can access bargains during periods of market stress 

Impact investing offers measurable results

The largest managers have an inbuilt edge

Gold offers diversification and protection from inflation

When the market environment is volatile and the outlook uncertain, alternative investments can play an important role in portfolios. As well as offering diversified sources of returns, they can boost long-term performance.

Alternative investments can provide sources of returns that are not correlated with traditional assets, such as equities and bonds. They are particularly useful components in a diversified portfolio because they can counterbalance a downturn to some degree – when markets are falling, alternative strategies should help to offset some of the losses.

Some alternative investments can also help to boost portfolio performance over the long term. For instance, private equity firms tend to have access to information that can give them an investment edge. They can provide financial support to companies and help them renegotiate loan terms and debt obligations. As a result, private equity-backed companies are generally more resilient during a downturn.

Hedge fund managers have access to a larger toolbox than traditional asset managers, such as leverage and derivatives, which gives them more flexibility to manoeuvre during challenging periods for financial markets.

Alternatives also include economically decorrelated assets with strong sustainable characteristics. For example microfinance funds are typically exposed to localized emerging and frontier economies rather than the broad economic cycle, while agricultural finance funds are impacted more by the weather than financial markets.

Low correlation can protect during volatile periods

1

Private markets can access bargains during periods of market stress

2

When conditions in financial markets become stressed, the prices of some securities no longer accurately reflect the value of the assets they represent. These dislocations create opportunities for private equity funds. The best vintages have often coincided with dislocations in public equity markets, such as in 2001 following the dotcom crash and in 2008 after the US subprime mortgage crisis.

With $2.3 trillion in capital to invest across private markets (and more than $700 billion in buyout capital alone), managers are looking to take advantage of falling asset prices. As happened during the 2008 Global Financial Crisis, the first wave of opportunities will probably come in the form of distressed assets.

The reduced availability of high yield debt and syndicated loans creates the opportunity for private equity firms to buy companies at bargain prices. In addition, any forced liquidations of investment portfolios allow secondary funds to purchase quality assets at discounted prices. Key sectors are likely to be those affected the most by the coronavirus crisis, including tourism, aviation, hospitality, restaurants, oil and industrials with severe supply-chain issues.

Impact investing offers measurable results

3

Impact investing is an exciting and rapidly growing movement driven by investors who are determined to improve our society and environment in measurable ways, as well as generate attractive financial returns. It is taking place all over the world.

Investing in well-managed companies that have a positive impact on our world makes good financial sense. For example, those that use energy efficiently and invest in training their employees could outperform their competitors and return more value to investors. Over the long term, they may be better prepared to meet future strategic challenges and take advantage of new business opportunities.

Demand from investors to consider environmental, social and governance factors has encouraged the growth of dedicated impact funds. Since 2017, six of the largest private equity managers have raised or announced plans to raise about $9 billion in impact funds. They know that large companies are willing to pay more to acquire sustainable brands. A study by management consultants McKinsey found that companies with a positive ESG record attract a 10% premium over those with a negative one.

The largest managers have an inbuilt edge 

4

The huge dispersion of returns in the alternatives sector makes manager selection essential – the best funds outperform equity and bond markets, but the worst significantly underperform. 

A number of high-profile scandals over the past few years highlight the importance of conducting proper due diligence on funds before investing. Investors must ensure managers have robust operational and risk management systems in place, as well as solid counterparty and financing arrangements so they can effectively manage periods of disruption, such as the Covid-19 crisis.

The increasing legal and compliance costs associated with meeting regulations give large established firms an advantage. To gain access to these managers, private clients can use feeder funds or alternatives portfolios provided by wealth managers.

Within impact investing, the arrival of large mainstream managers with strong track records and extensive resources has improved the rigour of investment analysis. This trend has been very beneficial for fund selection teams seeking both impact and competitive returns.

Gold offers diversification and protection from inflation

5

When the going gets tough in the global economy and markets, investors tend to turn to gold as a safe haven. We expect prices are likely to remain higher as central banks implement large doses of monetary policy because gold is widely viewed as a hedge against currency debasement. Rising debt levels and low interest rates could continue to offer their support too.

Gold is more than a store of value in times of uncertainty – it also provides a hedge against inflation. We don’t expect prices throughout the economy to rise substantially any time soon. However, markets could be underestimating the inflationary pressures that will come when the lockdown lifts and the global economy reopens for business.

Lastly, gold can provide a genuine source of diversification in portfolios because of its low correlation with other financial assets. With yields on government bonds at unattractively low levels – and even negative in some instances – gold offers potentially more attractive returns as an alternative safe haven.

From a sustainable investing perspective, gold presents some challenges. Mining often has a negative impact on the environment and local communities, and has long been a dangerous profession for the people who go to work underground. But the investment landscape is changing. Responsible investors are increasingly turning to physical gold that has been recycled or gold that has been mined more recently, when industry employee and environmental standards have improved.

ALTERNATIVES

03

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Average index performance during the largest monthly S&P500
decline each year from January 1994 to December 2019

Source: CAIA Association, Bloomberg

Past performance is not a reliable indicator of future returns

Hedge funds tend to outperform equities during periods of market stress

Downturn

Downturn

Past performance is not a reliable indicator of future returns

U.S. buyout returns by vintage Year

Source: iCapital Network, Cambridge Associates

Some of private equity’s strongest vintages started investing during downturns 

Total gold holdings in ETFs

December 2019

March 2020

Average valuation for Companies with a positive ESG

Source: McKinsey

Companies with positive ESG records have valuations that are on 
average 10% higher than similar businesses with negative ESG records

Gold-backed ETFs have attracted huge inflows since the start 
of the year and global holdings have reached new record highs

Range of average annual return
from bottom quartile to top quartile over 10 years

Source: Lipper, NCREIF, Cambridge Associates, HFRI, J.P.Morgan Asset Management

Past performance is not a reliable indicator of future returns

The difference between the best and worst performing managers is larger
for alternatives

Source: World Gold Council

An alternative perspective


ALTERNATIVES



5 POINT SUMMARY OF THIS ARTICLE


2

3

4

5

When the market environment is volatile and the outlook uncertain, alternative investments can play an important role in portfolios. As well as offering diversified sources of returns, they can boost long-term performance.


ALTERNATIVES

03

Low correlation can protect during volatile periods


1

Alternative investments can provide sources of returns that are not correlated with traditional assets, such as equities and bonds. They are particularly useful components in a diversified portfolio because they can counterbalance a downturn to some degree – when markets are falling, alternative strategies should help to offset some of the losses.

Some alternative investments can also help to boost portfolio performance over the long term. For instance, private equity firms tend to have access to information that can give them an investment edge. They can provide financial support to companies and help them renegotiate loan terms and debt obligations. As a result, private equity-backed companies are generally more resilient during a downturn.

Hedge fund managers have access to a larger toolbox than traditional asset managers, such as leverage and derivatives, which gives them more flexibility to manoeuvre during challenging periods for financial markets.

Alternatives also include economically decorrelated assets with strong sustainable characteristics. For example microfinance funds are typically exposed to localized emerging and frontier economies rather than the broad economic cycle, while agricultural finance funds are impacted more by the weather than financial markets.

With $2.3 trillion in capital to invest across private markets (and more than $700 billion in buyout capital alone), managers are looking to take advantage of falling asset prices. As happened during the 2008 Global Financial Crisis, the first wave of opportunities will probably come in the form of distressed assets.

The reduced availability of high yield debt and syndicated loans creates the opportunity for private equity firms to buy companies at bargain prices. In addition, any forced liquidations of investment portfolios allow secondary funds to purchase quality assets at discounted prices. Key sectors are likely to be those affected the most by the coronavirus crisis, including tourism, aviation, hospitality, restaurants, oil and industrials with severe supply-chain issues.

When conditions in financial markets become stressed, the prices of some securities no longer accurately reflect the value of the assets they represent. These dislocations create opportunities for private equity funds. The best vintages have often coincided with dislocations in public equity markets, such as in 2001 following the dotcom crash and in 2008 after the US subprime mortgage crisis.

Private markets can access bargains during period of market stress

2

Impact investing offers measurable results


3

Impact investing is an exciting and rapidly growing movement driven by investors who are determined to improve our society and environment in measurable ways, as well as generate attractive financial returns. It is taking place all over the world.

Investing in well-managed companies that have a positive impact on our world makes good financial sense. For example, those that use energy efficiently and invest in training their employees could outperform their competitors and return more value to investors. Over the long term, they may be better prepared to meet future strategic challenges and take advantage of new business opportunities.

Demand from investors to consider environmental, social and governance factors has encouraged the growth of dedicated impact funds. Since 2017, six of the largest private equity managers have raised or announced plans to raise about $9 billion in impact funds. They know that large companies are willing to pay more to acquire sustainable brands. A study by management consultants McKinsey found that companies with a positive ESG record attract a 10% premium over those with a negative one.

The largest managers have an inbuilt edge 

4

The huge dispersion of returns in the alternatives sector makes manager selection essential – the best funds outperform equity and bond markets, but the worst significantly underperform. 

A number of high-profile scandals over the past few years highlight the importance of conducting proper due diligence on funds before investing. Investors must ensure managers have robust operational and risk management systems in place, as well as solid counterparty and financing arrangements so they can effectively manage periods of disruption, such as the Covid-19 crisis.

The increasing legal and compliance costs associated with meeting regulations give large established firms an advantage. To gain access to these managers, private clients can use feeder funds or alternatives portfolios provided by wealth managers.

Within impact investing, the arrival of large mainstream managers with strong track records and extensive resources has improved the rigour of investment analysis. This trend has been very beneficial for fund selection teams seeking both impact and competitive returns.

Gold offers diversification and protection from inflation

5

When the going gets tough in the global economy and markets, investors tend to turn to gold as a safe haven. We expect prices are likely to remain higher as central banks implement large doses of monetary policy because gold is widely viewed as a hedge against currency debasement. Rising debt levels and low interest rates could continue to offer their support too.

Gold is more than a store of value in times of uncertainty – it also provides a hedge against inflation. We don’t expect prices throughout the economy to rise substantially any time soon. However, markets could be underestimating the inflationary pressures that will come when the lockdown lifts and the global economy reopens for business.

Lastly, gold can provide a genuine source of diversification in portfolios because of its low correlation with other financial assets. With yields on government bonds at unattractively low levels – and even negative in some instances – gold offers potentially more attractive returns as an alternative safe haven.

From a sustainable investing perspective, gold presents some challenges. Mining often has a negative impact on the environment and local communities, and has long been a dangerous profession for the people who go to work underground. But the investment landscape is changing. Responsible investors are increasingly turning to physical gold that has been recycled or gold that has been mined more recently, when industry employee and environmental standards have improved.

Gold-backed ETFs have attracted huge inflows since the start of the year and global holdings have reached new record highs

Source: World Gold Council

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Source: Lipper, NCREIF, Cambridge Associates, HFRI, J.P.Morgan Asset Management

Past performance is not a reliable indicator of future returns

The difference between the best and worst performing managers is larger for alternatives

Source: McKinsey

Companies with positive ESG records have valuations that are on average 10% higher than similar businesses with negative ESG records

Source: iCapital Network, Cambridge Associates

Past performance is not a reliable indicator of future returns

Some of private equity’s strongest vintages started investing during downturns 

Source: CAIA Association, Bloomberg

Past performance is not a reliable indicator of future returns

Hedge funds tend to outperform equities during periods of market stress

1

Low correlation can protect during volatile periods

Private markets can access bargains during period of market stress 

Impact investing offers measurable results


The largest managers have an inbuilt edge


Gold offers diversification and protection from inflation

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For further information, please visit: www.quintet.com

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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.
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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.

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