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Low yields have presented a significant challenge to investors for a number of years. We see a moderate US-led reflation which is slow and expect inflation and interest rates to reach levels well below the average of past recovery peaks. While global growth is likely to pick up, yields are still at low or negative levels and we expect them to stay low in Europe and Japan in the foreseeable future. In our view, there are three paths which could offer potential returns to investors, while endeavoring to avoid assets with low yields and possibly negative returns. These include:
- adding to higher yielding bond strategies given that high yield in particular now offers an attractive yield pick-up relative to developed world government bonds – one which we believe more than compensates investors for the higher risk involved
- within equities, a focus on unconstrained strategies capable of generating returns in differing environments due to more active and flexible investment approaches
- increasing exposure to alternative asset classes, such as hedge funds, real estate, infrastructure and private equity, which can help to improve the overall risk-adjusted return potential of investors’ portfolios
In summary, the low yield backdrop certainly presents all investors with challenges. But even in this environment, there is still a broad range of investment solutions that mean investors’ experiences do not have to be negative – even if some government bond yields still are.
Alternative asset classes
- A&Q Neutral Alpha Strategies Limited J-USD