The best of the alternatives in 2011

Maria Merricks asks three industry experts which alternative asset class has been the best performer over the past 12 months.

Haran Arumugam, analyst, Prudential’s PMG

We think this year has been an important one for infrastructure. Infrastructure is broadly defined as asset-heavy industry providing essential public services. They tend to be highly regulated and cash generative, such as transport and utilities. Today, governments around the world are considering infrastructure spending and investment to boost flagging economic growth. Some others are looking to balance the books by selling previously state-owned assets.

Over the past 15 years some 700 PFI (Private Finance Initiative) projects have been procured, most of them successfully delivering on time and within budget. The market for PFI also continues to grow rapidly in the younger markets of Canada, Germany and France.

Infrastructure is a high yielding asset class with built-in linkages to inflation. Most developed markets are exhibiting negative real rates of return on cash so the investor attraction to asset-backed, long-term contracted revenues is clear. Retail investors are also benefitting with increased opportunities to allocate. Historically, infrastructure investments have only been available in a closed-end manner to professional investors; this market continues to grow with more investors upping their allocations to the sector.

However, the UK listed specialist fund sector now has a handful of infrastructure funds, all with shares actively traded on the secondary market. They offer a wide range of exposures, from UK public sector services to Indian power plants. This year alone, over £300m in capital has been raised for further deployment by the funds. That figure could very soon rise to over £600m with the IPO of a new global fund as well as a C share issue of an existing one.

It is clear interest and investment in the infrastructure market is growing- both from supply and demand dynamics.

David Coombs, head of multi asset investments, Rathbones

The best performing strategies remain discretionary macro trading hedge funds and directional systematic trading hedge funds. Both have historically displayed a low correlation to ‘risk’ assets and are often overlooked by investors. These remain our preferred alternative strategies as we head into 2012, as both are designed to do well in volatile markets and have protected portfolios on the downside over the past year.

The discretionary macro traders operate in liquid markets. These are nimble vehicles, which run under a high level of risk management. We hold the Brevan Howard Macro fund, an example of a discretionary strategy and a listed investment trust. We think this structure is the most appropriate for these strategies, given the permanent nature of the capital. It allows the lead manager to allocate capital efficiently. Year-to-date, the fund has returned +23.23%.