New Avenues for Diversification
Alternative assets take allocation to the next level
The market turmoil following the 2007-2008 financial crisis has prompted individual investors to seek new ways of diversifying their portfolios. In this Q&A, Janus VP of Product Strategy and Development Kelly Hagg and Senior Product Manager Philip Reardon explain how Janus is creating opportunities to invest in alternative assets and adding a global (and alternative) mandate to its asset allocation funds to meet client needs.
Why is Janus offering investors exposure to new asset classes?
KH: The lesson of the financial crisis and its ongoing fallout is that most "tried-and-true" diversification techniques didn't work when the market was shocked to its core. The traditional 60/40 stocks-to-bonds portfolio took a beating as a wide variety of asset classes within the stock category declined. Many types of bonds suffered as well. Unfortunately, in a negative market, a wide variety of assets tend to decline simultaneously - in investing terms, they are highly correlated.
PR: Most of today's retirement-oriented investors are highly invested in stocks and use bonds as a diversifying "anchor." But when interest rates are low for a prolonged period - as they have been - parts of the bond market can become overvalued. Investors' portfolios also tend to be tilted heavily toward domestic holdings. To diversify both their stock and bond investments, investors may need to look farther afield, whether by going global or into alternative asset classes.
How have the Janus Asset Allocation Funds added new levels of diversification?
KH: Each of the Asset Allocation Funds - Conservative, Moderate and Growth - now allocates a significant portion of its net assets to non-U.S. investments, to take advantage of the ways foreign markets perform differently from U.S. markets. The funds added "Global" to their names to reflect the change. In addition, each of these funds is now allowed to invest a portion of its portfolio in "alternative" investments. Our alternative funds include the Janus Global Real Estate Fund, as real estate has been shown to have a low correlation with stocks and bonds over time. They also include the new Janus Diversified Alternatives Fund, which launched in late December.
Tell us about the Janus Diversified Alternatives Fund.
KH: The goal of this Fund is to deliver absolute returns with a low correlation to the returns generated by stocks or bonds. The Fund will invest in stocks, bonds, commodities and currencies, and use a variety of trading techniques involving instruments such as derivatives. Derivatives are financial instruments - such as options and futures - that derive their value from underlying assets or indices.
Don't complex investing techniques carry considerable risk?
KH: Yes. But we employ a wide variety of these techniques in the Fund - about 11 - in a strategic manner to spread the risk. The aim is that each of these techniques will have a small correlation to the others, so that none carries a significant portion of the portfolio risk. If a given return technique falls out of favor, then its impact on returns is generally mitigated.
How did Janus prepare to enter this new field of investment?
KH: We've been talking about this strategy for a few years, but we needed to get the right people in place. In May, we hired Andrew Weisman as CIO to lead our alternative and multi-asset client solutions. Andy has spent 25 years in portfolio construction and risk management. He will co-manage the Fund along with John Fujiwara, whom we also hired in 2012. Finally, we hired Dr. Richard Lindsey as Chief Investment Strategist for liquid alternatives. Dr. Lindsey has been a chief economist at the Securities and Exchange Commission, president of Bear Stearns Securities and a finance professor at the Yale School of Management.
PR: Janus strives to be a global solutions provider. We offer the building blocks for a successful portfolio and solutions to our clients' investing problems. We see the Janus Diversified Alternatives Fund and redesigned Asset Allocation Funds as some of those potential solutions.