The recent volatility in equity markets should serve as an opportunity for financial advisers to assess the resilience of their clients’ investment portfolios against future market downturns.
Some investment portfolios, particularly those comprising solely of traditional assets, may struggle when markets fall. Traditional assets, by definition, rely on the continued appreciation of prices to produce returns.
Given the heightened level of uncertainty in the geopolitical and economic climate globally – contributed by factors including the possibility of Janet Yellen raising rates in the US, the adjustment facing Australia following the end of our resources boom, doubt in China’s ability to maintain its growth targets, and nervousness surrounding the state of Europe – many commentators are beginning to question whether equity markets will continue in an upward trajectory over the medium term.
Regardless of whether financial advisers believe current price levels are sustainable or otherwise, it may be prudent to consider strategies that have the potential to mitigate some of the downside risk in their client’s traditional investment portfolios.
One way of potentially limiting the downside of traditional assets is through an allocation to a managed futures strategy, such as Man’s AHL Alpha Program.
To explain, let us examine the investment approach. The AHL Alpha Program is different from traditional assets because it has the ability to profit from directional price trends in markets, irrespective of the direction of the price trend. This means the AHL Alpha Program has the capacity to profit when markets are rising and also when markets are falling.
So, where a traditional long equity portfolio can only make money if equity markets appreciate, and will likely lose money if equity markets depreciate, the AHL Alpha Program may profit in both market regimes and is not dependent solely on appreciating prices. This differentiating attribute is one of the reasons why the AHL Alpha Program may provide downside limitation to a portfolio.
Moreover, the AHL Alpha Program is a highly diversified investment and is not constrained to trading just equity markets. The AHL Alpha Program applies its investment approach to over 400 global markets across a range of sectors including stocks, bonds, credit, metals, currencies, agriculturals, interest rates and energies.
To demonstrate how the AHL Alpha Program performs differently to equities, the six largest drawdowns in the Australian equity market are shown in the chart below (black columns), in chronological order from left to right. For the same drawdown periods, the performance of the AHL Alpha Program is also shown, net of fees (orange columns).
Six largest drawdowns in the Australian stock market
October 1995 to September 2015
Financial adviser use only. Past performance is not a reliable indicator of future performance.
The Australian stock market corrections are measured by the six largest drawdowns in the S&P/ASX 300 (Accum.) Index, between October 1995 and September 2015. To illustrate Man’s longest running AHL Alpha Program, the past performance of AHL Alpha plc from October 1995 to September 2012, AHL Strategies PCC Limited: Class Y AHL Alpha USD Shares from September 2012 to August 2014 and AHL Alpha (Cayman) Limited from August 2014 to September 2015 are used in this chart. All of these entities invest in the same way as the AHL Alpha Program. This chart does not show the performance of Man AHL Alpha (AUD). It is not designed to predict or forecast the future performance of the AHL Alpha Program or Man AHL Alpha (AUD). The fees and costs that will apply to an investment in Man AHL Alpha (AUD) will be in accordance with those set out in Section 5 of the PDS and are different from the fees and costs payable by the AHL Alpha Program. The final weekly valuation for a month is used to calculate the monthly return of the AHL Alpha Program. Performance figures are calculated net of all fees as at 30 September 2015. Performance figures are measured as the rise or fall in price during the periods of drawdown set out in the charts above. The periods selected are exceptional and these results do not reflect typical performance. As a consequence they give no indication of likely performance. Performance figures are calculated net of all fees as at 30 September 2015.
Source: Man Group database.
In each of these drawdown periods, the AHL Alpha Program has been able to mitigate the downside, and in some cases generate strong positive returns, reinforcing its diversification benefits2.
Advisers looking for strategies to diversify their clients’ investment portfolios with the aim to limit risk from market downturns may want to consider Man AHL Alpha (AUD).
