Home / Stock up on alternative assets, says Willis Towers Watson

(pictured: Aongus O’Gorman)

Investment consultant Willis Towers Watson has downgraded its investment outlook for the year ahead and is advising clients to add some alternative assets with genuine diversification characteristics to their portfolios.

Speakers at last week’s WTW Ideas Exchange in Sydney this month acknowledged that investors might be sceptical about some of the alternatives on offer, with merger arbitrage hedge funds, reinsurance funds and high yield debt in the mix.

But with little likely to come from local or overseas equity markets, bonds or cash, the message was to think outside the square.

Nick Barrett, a senior investment consultant at Wills Towers Watson, says the group’s central theme is that a debt overhang is weighing on global growth and is making markets more susceptible to shocks.

“There has been a slight deterioration in our view, compared with last year. We see an increase in downside risk and a mediocre outcome likely,” Barrett says.

He says the change in outlook is driven by increasing concern about China and its impact on the rest of the world.

“There is more risk of policy error there now. The Chinese economy has been reliant on credit for growth and some of that debt is going to go bad. The country is on a more volatile path,” Barrett says.

Another concern is the negative impact of lower commodity prices on emerging market economies.

WTW is neutral on Australian equities and underweight US equities. It is underweight investment-grade corporate credit, believing that risk premiums in that market are too low.

It thinks bonds are well priced but will be low yielding for some years.

Aongus O’Gorman, a senior consultant specialising in liquid diversifying strategiesa, says the group has been working on hedge fund strategies since 2008 and has been talking to clients recently about reinsurance funds and merger arbitrage.

“People are sceptical about these ideas when we bring them to their attention. That is understandable. You should be sceptical,” O’Gorman says.

WTW has also been talking to clients about high yield debt, with portfolios that include mortgage-backed securities, leveraged loans and direct lending.

“You need a very active perspective in these markets,” he says.

WTW’s preferred approach to equities is concentrated portfolios holding no more than 15 or 20 stocks. To get diversification investors could invest with several concentrated equity managers.

– John Kavanagh