3 asset classes offering value in a frothy market

To quote the legendary Jeremy Grantham’s thoughts on markets from The Rules of Investing podcast: “This is a bubble, this is serious”. Livewire readers share that sentiment on gravity-defying sectors; more than half of you believe cryptos and BNPL stocks are a “speculative bubble likely to pop” and high-valuations were cited as a likely drag on future returns.

Against a frothy valuation backdrop, we invited Australia’s leading researchers to share an overlooked asset class offering value on Livewire’s Top-Rated Funds Series.

Here are the three researchers putting their best ideas forward:

• David Wright, Zenith Investment Partners
• Aman Ramrakha, Morningstar
• Peter Green, Lonsec

You can watch the video by clicking the player or read an edited transcript below. Enjoy!

Edited Transcript

Ally Selby: What's one under-appreciated asset class that you think will be really important to investors' portfolio returns in the future?

Underappreciated asset class #1 - Alternatives

David Wright, Zenith Investment Partners

I think it's definitely alternatives. So when I talk about alternatives, it's really market neutral, global macro, managed futures, multi-strategy funds, that have not kept pace with the rally in markets. And to be fair, they were never going to keep pace. They're not designed to keep pace in roaring equity markets. And we've had a mainly one-directional market since then. So all of a sudden now we've got greater volatility. We've got greater uncertainty. 

We've seen through COVID that whole industry sectors have basically almost been closed. The environment for active management, in general, is much, much better than it was. And if we have, as I mentioned before, corrections as a result of inflation, overshoots, and bond yield spiking equity markets correcting, that's really where your alternative managers are going to come to the fore.

Underappreciated asset class #2 - Infrastructure

Aman Ramrakha, Morningstar

I think something like infrastructure is probably, certainly institutionally, and on the unlisted side, infrastructure's been in play for a long time. All the major super funds have been doing it. I think for retail investors, areas like property and infrastructure have suffered quite significantly. You think of airports and the like, but I do think that it's got some good long-term legs to it beyond some of the dislocation caused by the pandemic. 

Underappreciated asset class #3 - Mid-cap stocks

Peter Green, Lonsec

An area that is underutilised in portfolios is your mid-caps. There's a higher EPS (earnings per share) growth profile than your large caps on average. And if we use the Australian equity market, the top 20 stocks are dominated by banks and miners, whereas your mid-caps contain a lot of industrials who are actually growing as businesses, but it tends to be more liquid than the small-cap end.

With small caps, they're great for long-term investors, but sometimes you get these big drawdowns in the market and the like. And I also think that with the mid-caps, once again to use the Australian example, is they're more diversified. So you don't have a big weighting to banks and miners. And let's face it, that's got some macro risks that may be unintended bets that you're basically taking on. So you get that broader diversification.