Institutional investors are concerned that the current economic cycle is nearing an end and many of them are shifting away from equities and looking for ways to diversify. With the traditional stock and bond portfolio mix projected not provide the same type of returns, diversification and the inclusion of alternative investments have become more important than ever.
“The markets have had an extreme run in terms of really good performance over the last 10 years,” said Bill DeRoche, Chief Investment Officer & Portfolio Manager at AGF Investments LLC. “It’s up almost 17% annualized since it hit bottom in March 2009. If we look at the 10 years prior to that, the markets were actually down.”
While no one knows just how long the current run can the run last, when investors look at what can cause the equity markets to go higher, they can look at three key levers.
- How much more can the multiple expand?
- What is the potential for earnings growth?
- What is the potential for rates to go down?
Taking those levers into consideration, the potential for earnings growth has been diminished, said DeRoche.
“Most of the strategists are talking about very modest earnings growth,” he said. “Our view for the next few years are that the returns should be much more modest than what we’ve been experiencing lately.”
The Fixed Income Outlook
Investors can couple their equities outlook with a view on fixed income. “When we look at fixed income, our expected returns that we plug into our forecast are basically what the yields are,” said DeRoche. “Looking at yields, the expected returns from fixed income are also very modest.”
For investors with a balanced portfolio, performance over the last 10 – 15 years has been extraordinary. Rates have got lower and equities have done very well, and as a result investors have seen tremendous performance. “Our view is that what you’ve generated over that 10 – 15 year period is not what you can expect going forward,” said DeRoche. “As a result we are talking to our clients about adding different sources of return to their portfolio including alternative return streams.”
Alternative investment strategies may be a good way for investors to diversify away from traditional equity and fixed-income allocations and still maintain upside potential. Alternatives such as AGFiQ Global Infrastructure ETF (GLIF) and AGFiQ Dynamic Hedged U.S. Equity ETF (USHG) provide diversification through low to non-correlated return sources; greater risk-adjusted returns; reduced volatility and risk; hedging against rising interest rates or inflation; downside protection and capital preservation.
Learn more about alternative investment strategies in our Alternative ETF Channel.