Alternatives suit long-term investors, says Aberdeen

Mike Turner is Edinburgh-based head of global strategy and asset allocation and a director of Aberdeen Asset Managers and Aberdeen Pension Trustees.

He joined Aberdeen via the acquisition with Edinburgh Fund Managers in 2003. Turner joined Edinburgh Fund Managers in 1998 as head of fixed interest and strategy and, before that, worked for WorldInvest as head of fixed income. He has also worked for Gulf International Bank as a global fixed-income manager.

There's been an increasing amount of focus on alternative investments globally and in Asia in particular. Is it justified?
For us as a business, alternatives are becoming a bigger focus -- they've been on the agenda for a while. (Editor's note: Indeed, many firms, including sovereign wealth funds, are boosting their focus on or allocation to alternatives, and firms including Russell Investments and Samsung Securities are increasing their capabilities in this area.) 

The common mistake people make is thinking that alternatives should give you a shoot-the-lights-out return, but they are as much about diversification and non-correlated streams of revenue as anything else.

Returns from alternatives were down in the crisis, but they still performed a hell of a lot better than equities in 2008/2009. There was nowhere to hide in 2008, apart from in government debt.

What kind of alternative assets interest Aberdeen and why?
The world's becoming more interesting in terms of things like infrastructure -- in Asia, it's new infrastructure, while in Europe and the US we're talking replacement infrastructure. And given state budget deficits, we will undoubtedly see greater accessing of private-sector finance [to build] public infrastructure.

The replacement aspect through obsolescence has to spur demand for infrastructure to a significant degree. It will become an increasingly prominent asset class [and other firms, such as AMP Capital Investors, seem to agree on this].

Infrastructure returns five to 10 years ago were excessively good -- mainly because governments didn't know how to price risk properly and put out mis-priced contracts, but they are now more adept at that. But prospects are still good for returns.

Also, infrastructure has hybrid qualities between private equity, debt and inflation-linking. I'm not saying inflation will be a problem necessarily, but it offers that insurance.

Who are the main investors in infrastructure?
It's attractive to defined-benefit [DB] pension schemes, because of the correlation of DB liabilities with bonds/interest rates. If interest rates fall, that boosts the value of bonds and of infrastructure.

But in Asia, we're talking more about defined-contribution [DC]-type stuff. The fiscal situation is much better in Asia than it is in Europe and the US. The necessity to access private finance is nowhere near as great. Infrastructure probably won't be such big news in Asia as a result -- that's not to say that Asians won't invest in European or US infrastructure though.

Looking at other alternative assets, where are the attractive buys in real estate?
We think real estate is an increasingly attractive proposition. Property represent one asset class where there's not been so much spread compression -- you had it in credit, and dividend yields have come down from their extreme highs in equity, but not in real estate.

There are of course risks associated with certain markets. One market where we feel risks are priced in is the UK. We like UK property and have done for a number of months now. In Asia, there are better fundamental underpinnings -- better prospects for rental growth and so on -- but the UK's yield advantage is much greater. Also, sterling is weak, which makes property more attractive for foreign investors.

In the UK, commercial values are down by 30% from their peak [around July 2007], and sterling has depreciated 20% versus the euro, even more versus the dollar and similarly against the yen. As a result, UK commercial property has become 50-60% cheaper than it was 18-24 months ago. And anything that's dropped to that level from second half of 2007 is worth looking at.

How about commodities and currencies?
We like currencies as an alternative asset class and think it's vastly under-utilised by the investment community.

Commodities are a longer-term, big bull market play. Shorter term, there are problems [with the asset class], including an excessive supply of some commodities. It's a demand-driven phenomenon, as supply is relatively stable -- there's been a step change in demand since the recession of 2009. As we move ahead and economies gain traction, we'll see supply constraints again.

For example, the oil curve is in contango [the future delivery price is higher than the spot price] -- that's usually the sign of a slack market in short term, but the situation can change very quickly.

And how do you approach hedge-fund investments?
In my department, which covers multi-asset portfolios, we stick to funds of funds.

Hedge funds are very much alpha-focused, based on the skills of the manager. As a group, they have a lot of correlation with equity markets at times -- but shorter-term rather than longer-term correlation. Six-month rolling correlation statistics [for hedge funds] spend a lot of time correlated to the S&P 500. But beyond that they're not so highly correlated.

The key with hedge funds is to make sure they're not correlated [to other assets], by spreading risk. Hedge-fund blow-up risk is high. You have to be very on the ball when investing in individual hedge funds. Amaranth [a US hedge fund that blew up in 2006 due to disastrous bets on natural gas prices], LTCM [Long-Term Capital Management, John Meriwether's fund], Madoff and so on have shown that you need to spread your risk.