The Trouble wiTh TiNAThere is no questioning the fact that the human psyche has an effect on market

behaviour, and a lot of value can be added by trading a portfolio in line with how

markets will react, as opposed to how they should react given economic conditions.

A current example of this is the “TINA” theory (“there is no alternative”), which

suggests that much of the recent gains in stock markets are a function of the fact

that, with bond yields so unattractive, the higher dividend yields offered by equities

make them the only option for income-seeking investors.

The binary thinking that is still very prevalent in portfolio construction amongst

many practitioners - that the bulk of a portfolio should generally be in either equities

or bonds with a bit of cash for liquidity and trading (and maybe some property /

commodities / hedge) - does present some problems, in that many opportunities are

overlooked. This is an issue that can be managed in the longer term planning of an

investment strategy, by making a slight mind shift in how diversification is viewed. At

MitonOptimal, we are avid proponents of diversification: it is a pillar of our investment

philosophy and we do look a little wider afield though, to add as many weapons to

our arsenal as possible, either to generate returns or, when appropriate, protect

capital in all kinds of market conditions. One way of doing this is through the use of

different trading strategies: via the likes of hedge funds for instance, which are not

dependent on market direction and thus have non-correlated performance profiles.

Here, managers invest both long and short and use derivatives, often employing

mathematical models, to create a return profile that is completely uncorrelated to the

equity market through which they are investing.

This does not come without its pitfalls however, and thus is where the mind shift is

needed. Like anything else, there is no way of predicting short-term returns and

there will be times when these strategies underperform. Last year was a very good

example of this, where a lot of investors are unhappy that hedge funds in general did

not protect them during a period where the likes of equities did not offer much, but

the point is non-correlation, not negative correlation. If one can also get accustomed

to the idea that it will likely detract from returns through a rampant bull market, the

long-term benefits are undeniable, especially as an allocation through times where

neither equities nor bonds are a screaming buy.

Taking the Credit Suisse Hedge fund Index as an indicative benchmark, the long-

run benefits in terms of risk-adjusted returns (thus delivering a smoothed return

profile) are clear to see from the chart above. I can simply not make these

statements though without stressing the need for proper due diligence, to ensure

that you understand what you are investing in, from both a structural and investment

strategy perspective. That said, there are lots of options in the market these days

that reduces compliance risks: for example, we have the bulk of our alternative

exposure in daily-dealing UCITS structures, which do not have the potential liquidity

and transparency issues associated with traditional hedge fund structures.

In summary, there are actually many different return profiles out there to create a

diversified portfolio of assets and thus always an alternative, providing of course,

one is are truly comfortable with a long-term view and agnostic to short-term noise.

Equities and bonds will always form a crucial part of our portfolios, but others can

simply not be ignored.

AdvisoryServices

FundManagement

MitonOptimal Weekly Comment Week 33, 2016

This document has been issued by the MitonOptimal Group of companies. MitonOptimal Portfolio Management (CI) Limited is registered in Guernsey (Registration No. 36763) and is licensed and regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended. MitonOptimal South Africa (Pty) Ltd with registration no 2005/032750/07, which is an authorized Financial Services Provider (“the FSP”) with License No. 28160. MitonOptimal South Africa (Pty) Ltd complies with all the requirements of the Financial Advisory and Intermediary Services (FAIS) Act (Act 37 Of 2002). The content of this document is for information purposes only and does not constitute an offer or invitation to any person. The opinions contained in this document are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. MitonOptimal‘s prior written consent must be obtained before the contents of this document are communicated to any third party. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith but no representation is made as to their accuracy, completeness or correctness. MitonOptimal’s respective directors, officers, em-ployees and associates may have an interest in the products, services or service providers referred to herein. The value of investments and the income from them may vary and you may realise less than the sum invested. Past performance is not necessarily a guide to future performance and no guarantees are offered in respect of investment returns and/or capital invested.

www.mitonoptimal.com Simon morriSonHead of Quantitative Research &

Portfolio Manager