The performance of the Alternatives universe in the September 2020 quarter was again widely dispersed albeit sector performance was skewed to the upside.
After eight months of the global pandemic, many nations still struggle to control the virus and have expended all ordinary policy responses to prop up the global economy. Volatility in security prices remain, with added geo-political uncertainty and the US presidential election further clouding the global market outlook. Despite these uncertainties, the market has been largely unwavering in its ‘risk-on’ stance albeit retreating somewhat in September.
Managed future strategies were largely unfavourable over the quarter as choppy market conditions and shifting market sentiment hampered trends previously established. While stimulus led trends were evident early in the quarter, simmering geopolitical concerns and fears of a potentially more disruptive second wave weighed on markets late in the quarter. Credit exposure, notably high yield, was a reasonably strong performer through the September quarter. Additionally, risk appetite was also evident for less defensive areas of the fixed income securities such as emerging markets given the yield control measures in place within many developed markets. Commodities, as measured by the S&P GSCI Index, delivered a positive return in the third quarter, aided in part by US dollar weakness with oil the key laggard during the quarter.
As occurred in the previous quarter, the equity market neutral sub-sector continued its strong performance during the quarter. Stock dispersion continues to be elevated, which is highly favourable for the strategies. The market continues to punish companies operating in industries adversely exposed to the virus, while paying a significant premium for those with strong growth prospects or higher quality balance sheets that can survive the continued drop off in economic growth. Equity issuance slowed within the Australian market over the quarter. Equity issuance had allowed for strong alpha capture in the previous quarter as many offers were priced at attractive discounts to market prices.
Discretionary global macro strategies continued to post positive returns through the quarter benefitting from favourable cross-asset and inter-sector dispersion. The qualitatively driven strategies appear better placed to adapt and react to changing market conditions and significant central bank intervention compared to their systematic global macro peers. These tend to be better placed to balance the portfolio across asset classes using a combination of directional and spread trades in addition to dedicated hedges.
Private equity and debt markets were up through July and August, while those funds with exposure to real estate assets weighed on returns. Deal flow and activity is making a return, albeit not within the secondary market as might be expected. Given the strong rally and sentiment in public markets, stress and forced selling hasn’t yet materialised across the sectors, with the exception being real estate.
The focus of Managers largely remains on managing the current pool of assets and seeking opportunistic bolt-on acquisitions with controlling interest. Managers with excess capital are well placed to buy attractively priced business if forced selling becomes more widespread. Within private debt, the market has largely normalised, with risk appetite returning albeit the market less favourable for debt exposed to leisure, retail and energy sectors. Nonetheless, newly priced issues tend to require greater level of asset security and financial covenants which is favourable for the lender.
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