Bucket investment strategies can miss the alternatives nuance: Invesco
Invesco’s managing director and head of investment and strategy for APAC, Ashley O’Connor, has a vivid recollection of a presentation he attended about a decade ago. The presentation was on institutional investment strategy, but the lesson learnt applies to investors across all pools of capital.
“The title was something along the lines of The three most dangerous shapes in investing,” he recalled. “It obviously mentioned the pyramid scheme, but the one that stuck out for me was the bucket shape and the way we think of buckets in investing.”
The point being made in the presentation, and one that O’Connor clearly espouses, is that constraining portfolio construction into clearly defined buckets or categories is not only limiting and confusing, but potentially dangerous to investors.
“There are so many investment opportunities across the spectrum that don’t naturally fit into your traditional equity, bond or property buckets,” O’Connor explained to host Owen Raszkiewicz on The Australian Investors Podcast.
“On the extreme end of that you’ve got the growth and defensive buckets, [but] in my experience and through my career some of the best opportunities are actually in the mid-risk category, whether that be infrastructure… or senior secured loans.”
The concept of investment buckets can be limiting, O’Connor explained, because the investment world has expanded so much since the strategy was formulated. Alternatives to the traditional asset classes have expanded to fill bigger and more important sleeves in investment portfolios over the years, providing investors and advisers with better levels of non-correlated diversity to go with returns.
“Some investors are still wedded to the idea of bucketing into quite traditional asset classes, [but] that means you either miss out on good investment opportunities or you end up putting investment opportunities into categories, buckets or asset classes where they just don’t belong, and that’s fraught with danger.”
This danger is moreso present on the retails end of the spectrum than the institutional side, he explained, because retail investment tends to take a more binary view, with less flexible demarcation between growth and defensive asset classification.
“On the institutional side you can categorise things as partly growth, partly defensive, based on the actual underlying characteristics of the investment (or how much of the returns are driven by income versus capital growth), whereas I think one of the challenges in the wholesale or retail end of the market in Australia is it’s typically either 100 per cent growth or 100 per cent defensive with nothing in between.”
That issue, he said, is what can lead the popular bucket strategy astray; without appreciating or accounting for the nuances in investment types, opportunities are missed for optimal portfolio management.
“You’ve then only got equities, you’ve got bonds, you’ve got property, so opportunities fall through the cracks,” he said. “So if there’s one thing I think investors should move away from, it’s the constraints put on them by bucketing.
“I really like the idea of… alternative growth,” he continued. “These types of frameworks tend to be more nimble and tend to be more opportunity rich because folks can then open and broaden their horizons to things that may seem like equity but behave in a very different way.”