Steve Waddington, manager, Insight Global Absolute Return fund
Rate markets and real assets
Overall, we see rate markets having some diversification benefit. Even though wages in some areas are showing signs of a pick-up, the feedthrough into materially higher inflation seems unlikely.
Real assets in the form of infrastructure and securitised credit also have diversification appeal. We continue to favour infrastructure securities with a predominantly operational bias and strong, stable long-term cash flows. We believe a balanced portfolio of infrastructure holdings, including exposure to social, environmental, economic and aviation financing, will maintain an attractive low beta to equities.
Finally, while the volatility so far this year has not been easy to navigate, it does present opportunities for alternative strategies that offer asymmetric pay-off profiles or wide buffers to mitigate the impact of any further market weakness. The pay-off from such strategies generally accrues over time rather than being instantaneous, but they can be helpful in an environment characterised by late-cycle market dynamics.
Freddie Lait, CIO and founder, Latitude Investment Management
The most attractive portfolio diversifier today is still gold. For the past 12 months, including the recent sell-off in October, gold was one of the few assets to rise as equities fell.
Should equity markets fall again, it is likely that three things will change, all of which are positive for the price of gold. First, the US Federal Reserve may temper its hawkish enthusiasm, potentially stalling their hiking cycle for a period, which increases the relative attractiveness of gold.
Second, investors would buy US bonds, which currently offer attractive real yields of 1.2% and nominal yields of 3.2%, which would drive real yields lower.
Finally, the dollar would likely fall, as it has risen on expectations of continued Fed tightening and above-trend US economic strength. Continued trade wars and political uncertainty could also be a trigger for gold sentiment to inflect upwards, particularly given the current near-record negative sentiment.