Investors should be wary of piling into alternative assets in a bid to find extra returns in the low growth environment, according to Jupiter’s John Chatfeild-Roberts, who argues that a portfolio of little more than stocks and bonds can suit the bulk of a long-term investor’s needs.
Since markets bottomed-out in March 2009, markets have been on a generally upward trend. The S&P 500, for example, has led the pack with a close to 250 per cent total return in local currency terms while the FTSE All Share is up around 150 per cent; gilts have also made a strong gain of just over 40 per cent.
Performance of indices since 3 March 2009
Source: FE Analytics
These advances have tended to be driven by central banks’ ultra-loose monetary policy, whereby historically low interest rates and unprecedented quantitative easing (QE) programmes drove down bond yields and pushed investors into riskier assets like equities.
However, the high valuations now found across stock and bond markets has prompted some investors to look to increasingly niche assets, with areas such as aircraft leasing and litigation finance being sold as diversifying holdings with potential returns higher than those from more conventional assets.
The doubt about the potential for portfolios of equities and bonds to produce satisfactory returns was highlighted in a recent Nataxis survey, which polled more than 2,400 advisers and found that 77 per cent believe traditional stock and bond portfolios are no longer efficient in providing returns and managing risk.
Furthermore, around seven out of 10 adviser said there is a strong case for adding more alternative assets to a portfolio: “Those strategies that are outside the traditional realm of long-only equity and fixed-income may offer better diversification potential and the potential for enhanced risk-adjusted returns.”
Not all in the fund management industry are convinced by alternatives, however. 
FE Alpha Manager Chatfeild-Roberts (pictured) – manager of Jupiter’s popular Merlin fund of funds range – believes that alternatives are not necessarily appropriate for most investors, especially as a portfolio of stocks and bonds can cover most long-term eventualities.
“You have to look really carefully at alternative assets and you have got to know what your risks are,” he said.
“Paul Volker, the esteemed ex-head of the Federal Reserve, made a quip some years after being asked about financial innovation when he said the only useful innovation in finance over his time had been the ATM. What he was taking aim at was derivatives, structured products and other niche things. I know little about ligation funds and aircraft leasing, but they sound pretty flaky to me.”
Chatfeild-Roberts’ funds are overwhelming populated with stock and equity portfolios, with hardly any exposure outside of these mainstream asset classes.
For example, Jupiter Merlin Income – his largest fund with assets of £3.9bn – has 94.2 per cent of its portfolio in either equity or bond funds; there’s also 0.4 per cent in cash and 5.4 per cent combined in commercial property and gold.
Across the range, which he runs alongside fellow FE Alpha Manager Algy Smith-Maxwell, the Merlin funds have been close to their maximum equity exposure for some time in the managers’ view that economic data is on an improving trajectory.
UK-focused holdings in the range include CF Woodford Equity Income, AXA Framlington UK Select Opportunities and Artemis Income, while global exposure comes from the likes of M&G Global Dividend, Threadneedle European Select and Findlay Park American.
Chatfeild-Roberts said: “The basic principle of investing is trying to benefit from the growth in economies. In the round, companies grow with economies and over time economies do grow. Therefore, if you have a diversified portfolio of equities over a longish period of time and assuming you have made sensible investment choices, you should share in the growth of the economy.”
Performance of indices over 20yrs
Source: FE Analytics
“It might be a low growth world, but so long as it’s a growth world then you will share in that growth. If it’s a deflationary world – and a bad deflationary world at that – and you’re not growing, then that’s where there’s potential problems with shares. If the economy is shrinking, companies will have shrink with it. At that point, all you want is bonds and the safest ones would be government bonds, because governments tend not to go bust.”
Bond funds owned by the Merlin range at the moment include Jupiter Strategic Bond, M&G Strategic Corporate Bond and Kames High Yield Bond.
Given this, the manager sees little need to dip into alternative assets for his portfolios.
However, the Merlin funds opened their first commercial property position in more than a decade this year after asking Mayfair Capital Investment Management to launch a bespoke product. The Mayfair Capital Commercial Property Trust is now found in the Jupiter Merlin Income and Jupiter Merlin Balanced funds.
There’s also an allocation to the ETF Securities Physical Gold exchange traded funds in four of the Merlin portfolios, with the exception being Jupiter Merlin Worldwide. Gold has had a difficult run in recent years, since fallen from its record high in 2011 and struggling to regain ground since.
“I feel that the world is against gold for the moment,” Chatfeild-Roberts said. “Every time you get a blow-up in the Middle East or something else that you think would put a lighter under it, it doesn’t really happen so that makes me think there must be some really powerful forces against it.”
But the manager continues to hold the yellow metal in the belief that it could protect against possible ill effects of quantitative easing.
“It’s there for insurance purposes,” he said. “We should have sold all of it in 2011, so not doing that was a definite mistake. But with the QE backdrop you just feel that it would be a pity not to have just a little bit.”
Performance of Chatfeild-Roberts vs peer group since 1 Jan 2000
Source: FE Analytics
Chatfeild-Roberts started running the Jupiter Merlin funds in April 1997 and his process involves identifying the funds to benefit from changing market conditions highlighted by his team’s macroeconomic analysis. FE Analytics shows that since the start of 2000, the manager has made a 145.25 per cent return while his peer group composite is up just 63.62 per cent.
