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John TuohyAcuvest Limited

AlternativesA framework for making decisions about alternatives

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1. What are alternative investments?

2. Are institutional investors allocating significant

assets to alternatives?

3. What is the investment case for alternatives?

4. Where do alternatives fit in a portfolio?

5. What are some of the questions that need to be

considered in evaluating a particular investment?

Key questions

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Pension fund assets > $36 trillion (top 16 countries).

Significant increase in allocation to alternatives (top 7 markets).

Asset allocation

Source: Global Pension Asset Study – Towers Watson 2015

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Distribution of alternative assets

All Institutions Pension Funds

Hedge Funds 35% 19%

Private Equity 29% 35%

Property 24% 35%

Illiquid Credit 3% 2%

Commodities 3% 1%

Infrastructure 5% 8%

Other 1% -

100% 100%* As at end 2013.

Source: Global Alternatives Survey 2014 – Towers Watson

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Investment case

1. Diversification

2. Time varying nature of expected returns

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Bond yields

Germany Yield EUR LIVE Ireland Yield EUR LIVE

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

- 0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Source: Barclays Capital’s Curve.

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Markets have had a good run

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20 Year

Sources: DATASTREAM, BOFA ML EUR BROAD MKT. 10+Y (E) - TOT RETURN INDEX, MSCI AC WORLD  - TOT RETURN INDEX (Local Currency)

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Expected returns

Investors need to take more risk, or take risk more efficiently, to achieve comparable returns

Europe Traditional

Portfolio Total Return Risk Free Rate Beta Alpha

Since 197010.0% = 5.5% + 4.5% + ?

Expected?

= 0.3% + 3.3% + ?

Source: Bridgewater

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Portfolio construction framework

Return Objective

GrowthGrowth

DefensiveDefensive

Managed Growth /

Risk

Managed Growth /

Risk

Equity Risk Premium

Illiquidity Risk Premium

Long OnlySmart BetaLong/Short

PropertyPrivate EquityInfrastructureIlliquid CreditCredit Risk Premium

Multi Asset Funds

DGF / Abs Return FundsGTAAGlobal MacroWhich Can Include:•Commodities And•Currencies

Bonds

Defensive StrategiesManaged FuturesTail Risk Insurance

CorporateHigh YieldEM Debt

Highly Rated Eurozone Gov. Bonds

Managing Risk

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Evaluating

1. Investment case

2. Price

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Key messages

1. Diversification is important

2. Only invest in what you understand

3. DC schemes need to find ways to access illiquid alternatives

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