Due to their unique characteristics, we are taking a differentiated look at liquid and illiquid alternative investments.
We expect increased equity market volatility, and would therefore look to managers operating with a low net exposure, or seeking to outperform the market as relative sector valuations re-adjust to previous levels.
Expectations of greater divergence and decorrelation among asset classes may create a better environment for the sector in 2015. Recent research has focused on developing multi-model funds to identify and take advantage of different market environments.
Given the low absolute yield/carry across non-investment-grade credit, one focus could be on the relative valuations of secured debt (e.g., bank loans) against unsecured debt (e.g., high-yield bonds), both within companies and industries.
Mergers-and-acquisitions activity remains at high levels. In particular, consolidation in the energy industry is likely to create new opportunities. Managers may find interesting entry points for deals previously broken.
Private equity markets in Europe continue to perform strongly, with a high level of deal activity. The U.S. market also remains active, but valuations have become less attractive. Strong capital inflows over the last year are expected to fuel robust investment activity in Asia.
We expect to see further improvement in the U.S. market, particularly in the procyclical office and industrial sectors, where there is strong demand and limited new construction. In Europe, the real-estate recovery has spread to Germany and further gains are also likely in Southern Europe.
We would focus portfolios on companies benefiting from improving economic fundamentals and organic opportunities. North American rail companies appear well-placed for growth. Low interest rates support valuations of regulated U.S. utility names. Listed securities may offer opportunities.