Investment markets aren’t static: new asset classes emerge, while others become obsolete. It would be naïve to think that as multi-asset investors we can simply do what we’ve always done and achieve the same result. It is vital to evolve as markets evolve. 
This is particularly true in the era of quantitative easing. While loose monetary policy briefly looked like a short-term response to the global financial crisis, it now looks set to persist indefinitely as central banks struggle to reverse course.
Quantitative easing has changed the market environment in a number of ways. It has increased correlation between bond and equity markets, with both proving receptive to policy action from central banks – at least until recently. As such, the oldest tool for diversification – a balance between bonds and equities – is no longer as effective.
It has also changed the nature of equity investors, pushing them towards higher-quality growth assets. In a low interest rate environment, future cash flows become more valuable. This has allowed higher growth assets to attract more capital than they might have done in a different era.
However, the global financial crisis changed the investment landscape in other ways, notably from its impact on the banks and the risks they are willing to take. Banks have withdrawn funding from certain types of asset – smaller companies, infrastructure, corporate bonds – which has created opportunities for other investors to step in and fill the gap.
There are also broader changes, such as the rise of new technology and the emergence of the ‘stateless’, asset-light company. This changes the type of investment opportunities that are available and demands a different perspective. Within this environment, multi-asset investors need a broader toolkit to achieve diversity and create resilient portfolios. We believe we need to cast our net wide to ensure we capture these new opportunities.
For example, we would highlight the pre-IPO sector. Increasingly some of the world’s most exciting companies are staying in private hands for longer. This has long been a phenomenon in the US, with the rise of ‘unicorns’ such as Uber or Airbnb. The UK and, in particular, Europe, are starting to witness something similar.
In the US, the idea of a ‘crossover’ investor, one that bridges the gap between early-stage private equity and a full listing, is well-established, but it is less so in the UK. However, we are starting to see a number of funds launched in this area, including companies such as Merian with its Chrysalis fund.
This is a fertile part of the market. Of course, investors need to be long-term and should expect to hold pre-IPO investments for five years or more to see companies through their development cycle. However, specialists in this area argue that it offers real value, particularly in the UK, which provides the right environment for these businesses to flourish. Rightmove, Just Eat, AJ Bell, the Trainline and ASOS would be examples of this type of home-grown company.
There remains a significant funding gap in this part of the market in the UK and Europe. London is a notable incubator for earlier-stage companies. Europe still lags, but is catching up.
Infrastructure debt is another area that has been left behind by the banks and is also under-served by private debt markets. It is also an increasingly diverse market – investors can now look beyond traditional utilities and energy infrastructure and move on to digital infrastructure or renewable energy.
Infrastructure itself has proved a useful high-income option at a time when yield is hard to come by. Equally, that income is well-controlled – backed by a contract, which incorporates inflation-linked rises. Certainly, it can be complex and investors need to understand the covenants that are in place. However, this is an opportunity for those with the right research structure in place.
Global small cap is another area of interest for us. To paraphrase the Heineken ads, small cap can reach parts of the economy large caps can’t find. Outside the US, small caps tend to have a bigger economic representation within its country of domicile. They are diverse, only lightly-covered by research analysts. They also tend to have a more geographically spread revenue stream, which can insulate them at times of localised economic weakness.
This is only a selection. Investment markets continue to evolve, both as a result of the economic environment and as creative new ways emerge to match investors with areas that need funding. We believe it is vitally important to analyse these areas to ‘future proof’ our portfolios.
James Klempster is director of investment management at Momentum Global Investment Management. The views expressed above are his own and should not be taken as investment advice.