In an insightful webinar hosted by IFA Magazine, experts from Legal & General Investment Management (LGIM) delved into the evolving role of alternatives in a multi-asset portfolio. The session, co-chaired by IFA Magazine’s Editor Sue Whitbread and Senior Financial Journalist Jenny Hunter, featured discussions with LGIM fund managers Aimee Bowkett and James Giblin.
James and Aimee are both experienced and knowledgeable fund managers, and we were lucky enough to get access to their thoughts and insights on such a detailed theme of alternatives. Talking about what you can expect from the webinar, Aimee sums it up quite nicely: “In our latest webinar, we talk about the benefits of diversification in the context of the current market environment and how allocating more to alternative asset classes can help to boost diversification, and also what we mean by ‘alternatives’ in our portfolios.”
We’ve put together a brief overview of some of the main topics addressed in the webinar to give you a taste of what was discussed.
What are alternatives?
The webinar kicked off with a crucial clarification: what exactly constitutes “alternatives” in the investment world? Aimee Bowkett explained that alternatives are broadly defined as any asset class outside of the traditional trio of equities, bonds, and cash. The aim of investing in alternatives, she said, is “to find assets with different drivers of return than the traditional asset classes.” The ultimate goal, according to Bowkett, is “to achieve better risk-adjusted returns and improve overall portfolio diversification.”
James Giblin echoed this sentiment, adding that while many managers still heavily concentrate on traditional asset classes, there are missed opportunities in the realm of alternatives. “If there’s a free lunch available, we should eat it,” he said, referring to the diversification benefits that alternatives can bring to a portfolio.
The diversification benefits of alternatives
One of the key themes of the webinar was the significant diversification that alternative assets can provide. Bowkett and Giblin both highlighted how spreading investments across different types of assets reduces unrewarded risks and leads to more predictable outcomes over time. Giblin used a simple analogy of rolling multiple dice instead of one, explaining how increasing the number of assets reduces the likelihood of extreme outcomes.
Bowkett also noted that it’s not just about adding more assets to a portfolio; what matters is the correlation between those assets. “Correlations are measured on a scale from minus one to one,” she explained, “and the closer to zero or negative, the stronger the diversification benefit.” She emphasised that low or negative correlations between asset classes—such as between equities and bonds—can provide much-needed stability during times of market stress.
The speakers acknowledged, however, that correlations between assets are not static and can fluctuate over time. In 2022, for example, the traditionally negative correlation between equities and bonds turned positive, resulting in a challenging year for the classic 60/40 portfolio. “It was the worst year on record for the 60/40 portfolio,” Bowkett noted, highlighting the importance of having alternatives to mitigate such risks.
Alternatives beyond bonds
The session moved on to explore how alternatives t within the broader portfolio strategy, particularly in the context of a world where bonds have been less consistent from a diversification angle. Giblin explained how the rise of inflation and the subsequent tightening of monetary policy have disrupted the traditional equity-bond relationship. “We believe bonds remain a crucial part of multi-asset portfolios, especially as a diversifier in a demand shock recession,” he said. But he also warned that rising inflation could continue to challenge bonds’ ability to protect portfolios in certain market environments.
This is where alternatives come into play. Bowkett highlighted how listed infrastructure and real estate investment trusts (REITs) can provide diversification benefits while offering inflation protection. “Infrastructure assets, such as utilities and transportation, tend to have more stable cash flows and can be linked to inflation,” she said. This makes them valuable additions to a portfolio during periods of rising prices. Giblin added that alternative assets like high-yield bonds and emerging market debt also offer opportunities to diversify away from traditional bonds. “We’ve built a tool we call the ‘correlation galaxy,’ which helps us visualise how different asset classes interact with each other,” he explained. The key, he said, is finding those “intergalactic stars”—assets that have little or no correlation with traditional equities and bonds.
Thematic investing and alternative credit
As the discussion moved towards thematic investing, both fund managers explored how identifying long-term structural trends can introduce different return proles to a portfolio. Giblin explained that thematic equities, which target specific trends such as clean energy or artificial intelligence, are often classified as alternatives. While they may be correlated with broader equity markets in the short term, over the long run, they can provide differentiated performance.
Bowkett also discussed the role of alternative credit in multi-asset portfolios, referring to assets like high-yield bonds and emerging market debt. These higher-risk, higher-yielding assets can provide diversification benefits and boost portfolio income. “High-yield bonds, for example, have often been more correlated to equities than to traditional bonds, but with lower volatility,” she said. However, she cautioned that the current valuations of alternative credit assets are stretched, making them less attractive in the near term.
Active versus passive strategies in alternatives
One of the recurring questions from the audience was how LGIM balances active and passive strategies within its portfolios, particularly when it comes to alternatives. Giblin explained that while passive strategies work well in many asset classes, there are certain areas—such as high-yield bonds—where an active approach is more effective. “In high yield, you’re dealing with issuers who have higher default risk, so having an active manager to navigate those risks is crucial,” he said.
Bowkett added that infrastructure is another area where active management can add value, particularly in the context of ESG (environmental, social, and governance) investing. “We believe that in such a broad universe, an active approach allows managers to manage risks more effectively and select companies that are better aligned with long-term sustainability goals,” she said.
The future of alternatives
Looking ahead, both Bowkett and Giblin expressed optimism about the role of alternatives in portfolios, particularly in an uncertain economic environment. Bowkett highlighted the defensive nature of many alternative assets, which could provide comfort to investors facing potential recessions or inflationary pressures. “I think alternatives will continue to play an important role in providing diversification and protecting against downside risks,” she said.
Giblin agreed, noting that while alternatives may be harder to access and manage, they offer significant long-term benefits. “We have a large team of strategists and economists that help us stay on top of these assets,” he said. “For those managers who aren’t taking advantage of alternatives, they’re potentially missing out on a significant opportunity.”
Conclusion
The LGIM webinar offered a comprehensive look at how alternative assets can enhance diversification and improve risk-adjusted returns in a multi-asset portfolio. With traditional bonds facing challenges and equity markets exhibiting heightened volatility, alternatives such as infrastructure, REITs, high-yield bonds, and thematic equities are becoming increasingly important tools for financial advisers looking to build more resilient portfolios for their clients.
Access the webinar recording to hear the full conversation here
About James Giblin
James is responsible for managing a range of retail multi-asset funds, including a number of client model portfolios as part of LGIM’s Model Portfolio Service (MPS). He joins LGIM from LGT Wealth Management where he was a portfolio manager on the Model Portfolio team. James is a member of the Manager Research Group (MRG), with a focus on alternative investments. James graduated from the University of Nottingham and holds a Bachelor of Science degree in Economics. James is a CAIA (Chartered Alternative Investment Analyst) charter holder as well as a CISI Chartered Wealth Manager.
About Aimee Bowkett
Aimee is a Fund Manager responsible for managing LGIM’s Model Portfolio Service and assisting in the management of the Multi-Manager Funds. Aimee joined LGIM in 2016, originally as an Investment Specialist within the Multi-Asset Funds team where she focused on the team’s retail proposition, moving into the portfolio management team in 2021. Previously, she worked at AXA Investment Managers as a fixed-income product specialist.
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