Hedge funds and emerging markets offer a number of compelling alternative investment strategies in the current market environment, according to Janus Henderson’s Ian Barrass. 
Meanwhile, the property sector has proved particularly difficult to find new ideas for the lead manager of the £106m Henderson Alternative Strategies Trust.
Barrass has endured a tough time with the fund, which was bought by Henderson from SVM in 2013, but said it has turned a corner in the past two years.
The manager noted that due to the illiquid nature of many of the strategies in the fund he has struggled offload some of the worst performing investments, eventually just writing some off.
“I took over on 1 April 2013 and obviously at that point the performance was struggling but that was a month before the ‘taper tantrum’ and this fund was very heavily positioned towards commodities and emerging markets as well and they got hit very heavily,” he said.
“Because of the nature of the portfolio which is relatively illiquid, it did take time to restructure the portfolio but we [have] changed about 80-85 per cent of it now.”
The remainder of the trust is made up of investments from the previous regime that he believes still offer value to the strategy.
“It took a couple of years to actually restructure the portfolio in a material way and that was just the nature of the types of investments we inherited,” he added.
The trust, which he co-manages alongside James de Bunsen, has beaten the IT Flexible Investment sector average over 18 months, as the below chart shows, though it trails the benchmark FTSE World index over this period.
Performance of fund vs sector and benchmark since start 2016
Source: FE Analytics
The manager said: “Over the last year and a half the performance has improved a lot and the NAV has begun to improve again.
“We feel very much that the portfolio has been upgraded and the problems are behind us,” he added.
Below, Barrass tells FE Trustnet which sectors he has found the richest hunting grounds in and the sector he has struggled to find many new ideas.
Hedge funds
The first area Barrass has found new ideas is in the hedge fund space and long/short strategies, in particular, which he said offer good returns in rising markets but can also protect on the downside during times of market volatility.
“I think from the year-end in September 2016, the category where we have probably most actively increased our positions is the hedge fund sleeve,” the manager said.
“We can go up to 30 per cent of the portfolio’s value in hedge funds and we’re around 22 or 23 per cent now which is up from last year.”
The main reason for increasing the hedge fund exposure is due to market uncertainty, though he noted that on the whole the team are relatively constructive on markets.
“Global growth is still ticking over at around three per cent and has done for the last few years across the world and we are having a few EPS [earnings per share] upgrades now in Europe, Japan and even some in the States.
“Deflation is something that seems to have receded as a risk – so you can argue that the outlook globally isn’t too difficult.
“On the other hand some markets have run up a long way, the American market is an obvious example, so whilst we’re constructive and we’re not alarmed by pricing levels, especially in Europe and Japan, we just thought it made sense as we went into 2017 to increase the hedge exposure.”
Barrass said he is cautious about interest rate rises and more importantly how quickly they are going to occur in both the US and in the UK.
“If it’s gradual over the next few years then the markets hopefully will be able to digest those without any really cathartic responses to changes in the cost of capital,” he explained. “However, we are in a rising interest rate environment now and I think everybody accepts that.
“We use the hedge funds that we have, which are mainly long/short hedge fund, as they can perform well in up markets through their long books but we do look to that part of the portfolio to give us protection if markets do get choppier and we do have a down period.”
The four hedge fund strategies he uses in the portfolio are BlackRock European Hedge Fund, Majedie Asset Management Tortoise fund, Schroder Gaia Indus PacifiChoice and Sagil Latin America Opportunities.
Emerging markets
The second area Barrass has found opportunities is in the emerging markets, with a particular focus on the fixed income side rather than equities.
“We have increased some of our exposure to emerging markets having come out a lot of that in 2013 and have invested in a couple of Ashmore funds which are open ended emerging market debt funds,” Barrass said.
The main fund in this space is the £1.5bn Ashmore Emerging Markets Short Duration fund, which has been a top quartile performer in the FO Fixed Interest Emerging Markets sector over the last year, returning 10.2 per cent.
Performance of fund vs sector over 1yr
Source: FE Analytics
“This is an emerging market short-duration fund typically holding hard currency – so this is a dollar-denominated fund,” Barrass noted.
“This is a really interesting fund for us because they only invest in short duration – so bonds that are coming up to their last few years before their final maturity.
“It has quite a high carry, so a high yield – about 6 or 7 per cent we are getting in cash and because they are short duration we have limited duration and credit risk and we like that mixture of short-term credit risk with high yield.”
The manager added that when he bought into the fund 18 months ago the risk-adjusted returns were particularly favourable when compared to emerging market equities.
“Pricing has moved up on these types of bonds and I would say it has evened out though the equites have moved up as well, so I don’t think there is much in it anymore,” he noted.
Property
The area he has struggled to find new ideas in is the property sector, where he initially had to offload a number of underperforming assets when taking over the fund in 2013.
“Because we don’t invest in mainstream property funds we can’t go out and buy a huge UK or European commercial property fund like the rest of the market buys because it doesn’t fit the whole purpose of this portfolio,” Barrass said.
“So, we have to look for property opportunities in either emerging markets or very niche plays within developed markets and they are difficult to find.
“Emerging market property was a bit of a graveyard for this fund previously. There were a couple of funds that we inherited, one was a Croatian real estate fund, which performed very badly and there was also a South African property fund and there was not much we could do with them.”
Therefore the manager said he has been very cautious when investing in the sector and will not add new holdings that have question marks over them.
“Finding the right quality when you are looking for those emerging markets opportunities or regional niche opportunities have not been easy,” he said.
One strategy he has bought into however is UK-listed Summit Germany, which is focused on commercial, industrial and retail property across a whole range of cities in Germany.
“It is quite illiquid so it is well suited to HAST because being a closed-ended proposition ourselves we can take a position in this as long as we think it is good quality,” he said.
Performance of stock over 3yrs
Source: FE Analytics
The stock has performed well over three years, returning 113.60 per cent in sterling terms.
Barrass said: “There has been very little property construction in Germany since the financial crash so the supply/demand equilibrium is still very attractive as the economy has been growing and the demographics have been very positive for people needing property.
“This company bought some very good portfolios, has refinanced its bank debt incredibly attractively and has been able to buy properties at very attractive yields with potential for rental growth.
“It has made a double digit return over the last year but we are going to continue to hold it because there is more to come from the German property market.”