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Alternative Market Briefing

Investors may need to rethink portfolio construction as market cycle extends

Thursday, January 10, 2019

Money managers and investors may need to rethink how they view portfolio construction as we move later into the cycle, according to delegates at the recent Opalesque Switzerland Roundtable.

"For 30 years, interest rates have come down and most money managers have never experienced that when equity markets go down, they could also lose on the bond and fixed income allocation too. In a way we are in uncharted territory," said Daniel von Allmen, Chairman & CIO of Progressive Capital.

According to von Allmen, it is worrisome that more of the asset flows into fixed income have gone into riskier investments including high yield, leveraged loans, emerging market debt or private debt. " I think the wake-up call will be here when people are no longer asking questions like 'will I get 1% or 2% on that investment?', but rather ask, 'will I actually get my money back from that fixed income investment?'"

It can also be difficult for investors to fully understand and compare the exposures within these riskier areas of credit. Dr. Christian Kurz, Managing Partner & CIO at Strongbox Capital agrees. "You may see presentations stating, that the private debt segment has lower default rates in comparison to emerging markets government bonds, or corporate high yield bonds and that they have higher recovery rates. And then, when you check the footnotes, you realize that they refer only to their "private" and of course biased and limited data set," he said.

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