Around early 2011, I started preaching the importance of having Alternative Funds in our portfolios. I strongly recommended Amundi Volatility World and DB Systematic Alpha (a tracker for CTA Winton Futures). Around early 2012, I started to pitch AllianceBernstein Global High Yield with great success. From May 2012, I started to pitch AllianceBernstein American Income Portfolio, which uses a barbell strategy. But my recommendation of alternative funds has not always been met by hot reception. Shortly after recommending alternatives, Amundi Volatility World rose strongly from Aug 2011 to Feb 2012 due to the massive correction in the 2H2011 of equities. Amundi Volatility World ended up 5% between early July 2011to 3 Aug 2012, slightly over a year (green line). The only funds that beat Amundi Volatility World were the AllianceBernstein Global High Yield and AllianceBernstein American Income Portfolio (orange line).
DB Systematic Alpha ended up slightly positive at around 2.5% (reddish brown line). CTAs had a torrid time because equity trends were very short. It didn't help that just when it made positive returns by shorting equity futures between Aug to Oct 2011, most indices began to climb rapidly from then on. Also, CTAs were heavily long on gold futures, which peaked in Sep 2011 at around USD1930 oz and fell to USD1520 oz. CTAs remained long on gold since then although their exposure rapidly reduced because the trend was deteriorating. Right now CTAs are beginning to short gold. But CTAs have made a strong return because they finally got their trend correct: They are heavily long US 10 year Treasuries, which continues to fall in yield and rise in price. They are also heavily short EURUSD, which plunged from 1.3 to 1.2.
I was vilified by some RMs and clients because they were expecting alternatives to give immediate returns and the stock markets performed a miraculous recovery after Oct 2011. Furthermore, good bond funds that give high dividend yields, like AllianceBernstein American Income Portfolio gave 4.8% per year of dividends and the Global High Yield gave 6.5% per year, became investors' favourites.
But my rationale remains the same: alternatives are for diversification and long term holdings. If you are investing in funds while waiting for opportunities in the properties, it doesn't make sense to even buy high yield bond funds. The AllianceBernstein American Income Portfolio can drop by 10 - 20% in a market correction. If you were to leverage 2x, the drawdown can be 30 - even 60%! It will certainly mean huge losses for the investors if they were liquidate the funds at the worst possible moment to make other large ticket investments. For the Global High Yield, it can fall 20 - 30% in a recession so again, it doesn't make sense to use that as a "getting paid while you wait" strategy. I proposed the Amundi Volatility World and DB Systematic Alpha because both have long track records and are proven to give double digit returns in a bear market!
Look at the First State Dividend Advantage (red line). It is up by around 2% and this is considered a fantastic performance because the MSCI World is still down by 10%!
If you're thinking of employing a "getting paid while I wait" strategy, I suggest a portfolio allocation of:
20% Amundi Volatility World SGD Hedged
10% DB Systematic Alpha SGD
40% bonds (either SGD/NZD perpetuals/bonds, or AB AIP/AB GHY)
10% Schroder Asian Income / First State Bridge
10% Schroder Gold & Precious Metals / Gold ETF
10% First State Dividend Advantage
When the intermediate trend turns bearish (it is still trending up despite all the naysayers talking about the Bundesbank blocking ECB's rescue effort), I would sell off the First State Dividend Advantage and half of Schroder Gold and the balance funds to bonds Amundi Volatility World and DB Systematic Alpha.
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