Caspar Rock, manager of the Architas Diversified Real Assets fund, tells Investment Week how even amid a volatile backdrop, real asset funds can still deliver yield and suffer far less than equities
Why are alternative investments so important for investors in today's market?
Investment markets are currently turbulent, and we think investors need diversification beyond equities and bonds. In the six years since the equity market troughed in 2009, both stocks and bonds have increased in value enormously.
There is a convincing argument that says central bank monetary easing has been partly responsible for this price appreciation and that, as monetary policy tightens, this process may be reversed. If this happens, falling equity prices will not be offset by any gains in bond holdings.
This scenario highlights the need for ‘alternative' sources of returns in a portfolio. Some alternatives, notably real assets, are also able to generate a predictable income that allows income-seeking investors to reduce their reliance on high-yield bonds, emerging market debt and high-dividend stocks.
What is the investment strategy for the Architas Diversified Real Assets fund?
The fund's strategy is to invest in a range of real assets and alternatives to diversify returns from equities and bonds, provide an attractive level of income and offer some protection from inflation. Most of the investments we consider suitable for the fund display some or all of these characteristics and we are able to combine them in a well-diversified manner to create an all-in-one alternatives solution that doesn't sacrifice yield. We take a fund-of-funds approach picking the best-in-class managers for the asset classes we want exposure to.
How does it differ from other ‘alternative' funds like absolute return?
Many absolute return funds take their exposure to equities and bonds and use derivatives to create a return profile that is uncorrelated from traditional investments. Most of our alternative investments do not involve equities and bonds at all which provides greater transparency and, we believe, a better chance of maintaining less correlated returns in times of market stress, which many absolute return funds have failed to do.
As interest rates are set to rise, how will your portfolio perform?
Within our portfolio, we are positioned towards real assets that benefit from higher interest rates. For instance, we receive revenues linked to the London interbank lending-rate (LIBOR), on property debt, leveraged loans and asset backed securities. Given the weak outlook for growth we think it's unlikely central banks will increase interest rates significantly and risk choking off the recovery unless inflation has become a problem. In this scenario, our portfolio of real assets should perform well.
How does the fund offer inflation protection?
The fund aims to offer long-term inflation protection using diverse channels to provide protection during different phases of the market cycle.
Firstly, there are assets with a direct, contractual link to inflation such as social infrastructure. These projects have government backed contracts that generate revenues linked to the retail price index (RPI). This is the strongest and most direct form of inflation protection as it derives from government contracts that provide specified inflation linked revenues.
Secondly, the fund can invest in assets that have historically seen their values increase during economic expansions and inflationary environments, such as commodities.
Finally, we have exposure to some financial assets with cashflows linked to LIBOR, generating income to keep pace with inflation.
Some real assets can be classed as riskier assets, due to their liquidity profiles. How are these sorts of assets viewed in context to your portfolio?
The market for real assets, such as property and infrastructure is far less liquid than the bond and equity markets. This has historically restricted access to real assets to large, long-term institutional investors such as pension and endowment funds. However, it is possible to get real asset exposure by investing with the company that holds the assets.
Given the weak outlook for growth we think it is unlikely central banks will increase interest rates significantly and risk choking off the recovery unless inflation has become a problem
This provides exposure to the returns of the underlying assets and liquidity of the company's shares.
For instance, we can buy the shares in a company that owns doctors surgeries, instead of directly investing in the underlying properties.
When we do this, our liquidity analysis is based on the company's shares which are almost always more liquid than the underlying real asset. Once we have decided to invest in a listed real asset company, we check daily volumes and market capitalisation to ensure we maintain sufficient portfolio liquidity. We have formal limits setting minimum liquidity levels and these are monitored by an independent risk team.
The fund has been established since August 2014 and during that time there have been a number of drawdowns in equity markets. How does the fund perform in that type of environment?
Against this volatile backdrop, the fund has delivered an attractive yield and lower drawdowns than the equity market. While capital preservation is not an explicit target, the fund has suffered far less than equities during periods of volatility due to the stable, non-cyclical cash flows generated by many of the assets we invest in.
Past performance is not a guide to future performance. The value of investments and the income they generate can fall as well as rise in value. Your client could get back less than they invest. For more information, please contact Architas 
