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The alternative investment strategies to protect portfolios in an uncertain world

03 July 2024

TAM Asset Management is using an array of alternative investment strategies to lower volatility, diversify risk and add alpha.

By Emma Wallis,

News editor, Trustnet

The macroeconomic outlook is uncertain, geopolitical tensions are rising, a range of elections could yet roil markets, and many investors are concerned about lofty US equity valuations.

One way to deal with the broad range of potential outcomes is to dynamically allocate to different alternative investments as the situation changes, to protect against risks and boost returns, said James Penny, chief investment officer of TAM Asset Management.

Discretionary fund manager TAM allocates 5-15% of its model portfolios to alternatives, using global macro and long/short strategies, broader multi-asset funds, commodities and precious metals.

This is because the world remains in flux, with Penny noting the “inflation dynamic” and “interest rate dynamic” have completely shifted in recent years, while there remains a “roaring economy”.

“In the face of that, you have a lot of challenges on the macro front with two wars and record elections, so your alternatives bucket should look to try and take advantage of that and protect you,” he explained.

The universe of alternative investments is “so deep and so wide, and it's such a diverse toolkit, it's really becoming a phenomenal part of a manager's arsenal”, he added.

TAM invests in three absolute return funds to diversify away from equity market volatility: Fulcrum Diversified Absolute Return, JPMorgan Global Macro and Amundi Volatility World.

Performance of funds over 10yrs

Source: FE Analytics

Fulcrum Diversified Absolute Return is a broad multi-asset fund investing in equities, bonds, currencies, commodities and uncorrelated return streams, such as volatility strategies. It aims to beat inflation by 3-5% over rolling five-year periods with target volatility of 6-8%. In other words, it should beat cash and inflation substantially regardless of the market environment but be less volatile than equities.

Fulcrum’s chief investment officer Suhail Shaikh oversees the fund, which has an FE fundinfo Crown Rating of four.

JPMorgan Global Macro invests in equities, bonds and derivatives (volatility futures, bond futures and equity options and futures), with exposure to emerging and developed markets. Managers Shrenick Shah and Josh Berelowitz aims to keep volatility lower than two-thirds of the MSCI All Country World index over a two to three-year horizon.

This strategy also has a four Crown Rating, placing it within the top 25% of funds for alpha, volatility and consistently strong performance.

TAM’s third absolute return strategy, Amundi Volatility World, invests in exchange-traded derivatives within the listed options market to isolate volatility as an investable asset class. When the CBOE Volatility Index (VIX) rises, Amundi Volatility should also make gains, Penny explained. The fund is negatively correlated to the equity market over the longer term.

Meanwhile in the commodities and precious metals arena, the valuations of mining companies are still fairly low, despite gold hitting all-time highs. TAM is taking advantage of this dynamic by investing in Ned Naylor-Leyland’s Jupiter Gold and Silver fund.

“If you think that the precious metals market still has further to run, which we do, especially within the silver space, then it makes sense that you want to invest in the people pulling it out of the ground and selling it,” Penny said.

Naylor-Leyland has “a huge amount of experience within precious metals” and “understands the market”, Penny continued. “There are not too many of him around, there's not many active precious metals managers.”

The fund is quite niche, however. “It's not a massive position because it's quite volatile. It had a very, very tough 2023, so you need to treat it carefully.”

Its benchmark is a 50/50 split between the gold price and the FTSE Global Mines index but its performance is more correlated to miners than bullion, as the chart below illustrates.

Performance vs benchmarks over 5yrs

Source: FE Analytics

TAM also invests in silver and gold exchange-traded commodities (ETC) from BlackRock, as well as the HANetf Royal Mint Responsible Physical Gold ETC GBP.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.