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Completing the Alternative Investments Puzzle

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Putting the Pieces Together Part 2

In my previous blog, I discussed why I believe advisors and investors should approach alternative investments much like a jigsaw puzzle and offered an organizing framework that can help.  When putting together a puzzle, the first step is to sort and organize all the pieces. For alternatives, the first step is to organize and align the various alternative strategies with specific investment objectives.  This step is critical because it helps investors decide whether alternatives can help them meet their needs, and, therefore, whether they should invest in them.

Organizing the pieces and deciding whether to invest is just the beginning, of course. The next step is to start clicking the pieces into place within a broader portfolio. In this step, the question becomes how to fund the allocation — in other words, where do you take money from in order to put it into alternatives? This is where puzzle-makers have the advantage – there’s only one spot for each jigsaw piece. In a portfolio, choices must be made. But how?

It’s a complicated subject, and one that investors should always discuss with their advisors. As a general rule, I believe investors should base this decision on the return and risk characteristics of the alternative they want to add. By that I mean, I would first consider allocating away from fixed income to fund an alternative investment that had fixed income-like return and risk characteristics. The same would be true for equities.

Let’s look at different ways to allocate to alternatives using the framework as our guide:

• Objective – Inflation mitigation

Real estate investment trusts (REITs), commodities, master limited partnerships (MLPs) and infrastructure have historically performed well in inflationary environments.  Given that these alternative assets typically have had equity-like return and risk characteristics, investors, who meet certain risk criteria, could first consider allocating away from equities in order to fund an allocation to these assets.

• Objective - Principal preservation

As discussed in my first blog, relative value strategies such as market neutral seek positive returns in different market environments.  Given that these strategies typically have had bond-like return and risk characteristics, investors, who meet certain risk criteria, might consider allocating away from bonds to fund this allocation.

• Objective -Portfolio diversification

Global investing and trading strategies such as global macro, risk balanced and multi-alternative may potentially help buffer a portfolio if stocks and bonds fall in tandem.  Given that these strategies typically have generated stock-like returns with significantly lower levels of risk than stocks, investors, who meet certain risk criteria, could consider allocating away from equities to fund the allocation.

Objective – Equity diversification

Alternative equities strategies such as equity long/short or unconstrained equity may help investors diversify their stock exposure.  Given that these strategies have tended to generate equity-like returns with lower risk than traditional stocks, investors might consider allocating away from equities to fund the allocation. Furthermore, given the potential high correlations between equities and alternative equity strategies, some investors, who meet certain risk criteria, may view alternative equity as a core part of their equity allocation.

Objective – Fixed income diversification

Bank loans, unconstrained fixed income and long/short credit can help diversify a traditional bond allocation.  Given that these strategies have return and risk characteristics similar to that of bonds, investors may consider allocating away from fixed income to fund the allocation.  Similar to investor attitudes about alternative equity, some investors, who meet certain risk criteria, may view alternative fixed income as a core part of their fixed income allocation.

Of course, the above discussions are pretty straightforward if an investor holds just one of the five major investment objectives. Life isn’t always that straightforward, and investors often have goals that necessitate a combined approach. Two common investor goals are below:

Goal – Generate increased current income

To pursue this goal, investors, who meet certain risk criteria, may consider allocating to 1) alternative assets that generate current income (i.e. REITs, MLPs, and infrastructure), and 2) alternative fixed income strategies that generate current income.  In order to fund the allocation, the alternative assets portion could be funded from the portfolio’s equity allocation and the alternative fixed income portion could be funded from traditional bonds.

Goal – All-weather allocation to alternatives

A potentially “all-weather” allocation to alternatives is one that allocates across the five different buckets shown in the framework, either on an equal-weight basis, or emphasizing certain categories over others. In order to fund the allocation, investors, who meet certain risk criteria, could consider funding the alternative asset, global investing and trading, and alternative equity allocations by investing away from equities. The relative value and alternative fixed income allocations could be funded by allocating away from fixed income.

There are a variety of ways advisors and investors can allocate to alternatives, several of which are highlighted above. In addition, the charts below compare a 100% equity portfolio and a 60% stock/40% bond portfolio with:

  • The impact of the all-weather approach, shown by the “traditional plus 20% alternatives” pie.
  • The equity diversification approach, illustrated by the “traditional plus 10% alternative equity” pie.
  • The current income approach, shown by the “traditional plus 10% alternatives that generate income” pie.

To me, the key when allocating to alternatives is to align the different types of alternatives with specific client objectives in order to best achieve those objectives. Please keep in mind that the chart below is for illustrative purposes only and that it is not representative of any particular investment or strategy. There is no guarantee that the strategies described will meet income, performance or volatility objectives described. Past performance is not a guarantee of future results.

Davis_1215Capture

1 Inflation-Hedging Assets represented by FTSE NAREIT All Equity REIT Index, Dow Jones UBS Commodity Index and Alerian MLP Index. Principal Preservation Strategies represented by BarclayHedge Equity Market Neutral Index; Portfolio Diversification Strategies represented by BarclayHedge Global Macro Index, BarclayHedge Multi-Strategy Index and BarclayHedge Currency Traders Index; Equity Diversification Strategies represented by BarclayHedge Long/Short Index; and Fixed Income Diversification Strategies represented by Credit Suisse Leveraged Loan Index, HFN Fixed Income Arbitrage Index and BarclayHedge Fixed Income Arbitrage Index. Equities represented by S&P 500 Index. Fixed income represented by Barclays U.S. Aggregate Bond Index. An investment cannot be made directly in an index. Past performance is not a guarantee of future results. Risk is measured by standard deviation.
2 Equity Diversification Strategies represented by 10% BarclayHedge Long/Short Index.
3 5% Inflation-Hedging Assets represented by 2.5% FTSE NAREIT All Equity REIT Index and 2.5% Alerian MLP Index; does not include commodities. 5% Fixed Income Diversification represented by 1.66% Credit Suisse Leveraged Loan Index, 1.66% HFN Fixed Income Arbitrage Index and 1.67% BarclayHedge Fixed Income Arbitrage Index.

Important information

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Investing in infrastructure involves risk, including possible loss of principal. Portfolios concentrated in infrastructure securities and MLPs may experience price volatility and other risks associated with non-diversification. Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.in which those investments are traded.

There is a risk that the value of the collateral required on investments in senior secured floating rate loans and debt securities may not be sufficient to cover the amount owed,  may be found invalid, may be used to pay other outstanding obligations of the borrower or  may be difficult to liquidate.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Diversification does not guarantee profit or eliminate the risk of loss.

Volatility is the annualized standard deviation of returns.

Downside risk is the maximum decline based on the month end value of the index or portfolio.

Correlation indicates the degree to which two investment have historically moved in the same direction and magnitude.

Relative value strategies seek to provide positive returns above cash in all market environments, typically with lower volatility than the broad market. They generally employ arbitrage techniques to capture pricing anomalies by purchasing undervalued assets and shorting overvalued assets. The success of these strategies is driven by the managers’ security selection and strategy execution, as they seek to profit from the relative value created by the price differentials in the related securities.

Long positions make money when an investment rises in price.

Short positions make money when an investment falls in price.

Market neutral strategies use offsetting long and short stock positions in an attempt to limit non-stock-specific risk.

Macro strategies base their investment decisions on macro views of various markets around the world. They may take long and short positions within and across such asset classes as equities, fixed income and currencies.

Also known as risk parity strategies, risk-balanced portfolios are constructed so that each asset contributes a relatively equal amount of risk to the strategic allocation of the portfolio. These portfolios may also include a tactical overlay that allows managers to opportunistically adjust the strategic allocation.

Multi-alternative strategies invest in a number of different types of nontraditional asset classes and strategies.

Long/short strategies (equity or credit) typically take both long and short positions to benefit from rising prices on the long side and declining prices on the short side.

Unconstrained strategies (equity or fixed income) may seek returns in a variety of ways, including the creation of long/short exposures or the implementation of an unconstrained approach that allows the managers to pursue their best ideas across the equity or fixed income markets.

The FTSE NAREIT All Equity REITs Index is an unmanaged index considered representative of US REITs. The Dow Jones UBS Commodity Index is designed to be a liquid and diversified benchmark for the commodity futures market. It is a rolling index composed of futures contracts on 19 physical commodities traded on US exchanges. The Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. BarclayHedge Equity Market Neutral Index includes funds that attempt to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well-designed portfolios typically control for industry, sector, market capitalization, and other exposures. Leverage is often applied to enhance returns. Only funds that provide net returns are included in the index calculation. BarclayHedge Global Macro Index includes funds that carry long and short positions in any of the world’s major capital or derivative markets. These positions reflect their views on overall market direction as influenced by major economic trends and or events. The portfolios of these funds can include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments. Most funds invest globally in both developed and emerging markets. Only funds that provide net returns are included in the index calculation. BarclayHedge Multi Strategy Index includes funds that are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines. The use of many strategies, and the ability to reallocate capital between them in response to market opportunities, means that such funds are not easily assigned to any traditional category. Only funds that provide net returns are included in the index calculation. BarclayHedge Currency Traders Index is an equal weighted composite of managed programs that trade currency futures and/or cash forwards in the inter-bank market. BarclayHedge Long/Short Index includes funds employ a directional strategy involving equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional or sector specific. Only funds that provide net returns are included in the index calculation. BarclayHedge Fixed Income Arbitrage Index includes funds that aim to profit from price anomalies between related interest rate securities. Most managers trade globally with a goal of generating steady returns with low volatility. This category includes interest rate swap arbitrage, US and non-US government bond arbitrage and forward yield curve arbitrage. Only funds that provide net returns are included in the index calculation. The Barclay Hedge indexes are recalculated and updated as soon as the monthly returns for the underlying funds are recorded. Only funds that provide Barclay Hedge with net returns are included in the index calculation. The number of funds that are currently included in the calculations for the most recent months can be found at www.barlcayhedge.com. Please note that the calculation for the number of funds is time-stamped and that the number of funds will continue to increase until all funds categorized within the sector have reported monthly returns. Credit Suisse Leveraged Loan Index represents tradable, senior-secured, US-dollar-denominated, noninvestment-grade loans. The HFN Fixed Income Arbitrage Index includes funds that attempt to exploit pricing inefficiencies between credit sensitive instruments which may include government or corporate debt, structured securities and their related derivatives.


Four Ways Alternatives Can Prepare Portfolios for the Future

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Many advisors and their clients are now in the process of reviewing last year’s performance and discussing how to best position their portfolios for what’s to come.  These reviews are taking place against the backdrop of a multi-year bull market in equities, low interest rates, low levels of market volatility, a strengthening dollar and declining oil prices.

As advisors and clients look to navigate this landscape, I believe they should examine how alternative investments could be included in portfolios to potentially help achieve specific investment objectives.  To help with this task, I have listed four ways investors can use alternatives in seeking to meet common objectives.

Objective: Continue to participate in equity market upside, but with some downside protection.

  • Investors have enjoyed a strong run in equities over the past six years, and most analysts I have read predict 2015 to be another positive year.  That said, investors have also seen increased risks come into the market, such as Greece’s future in the eurozone.  For investors looking to participate in a rising equity market, while also seeking to limit the downside if the market declines, equity long/short funds may be able to help.  Equity long/short funds combine both long and short equity positions in a portfolio, while typically being net long to equities.  In these types of funds, the long positions would be expected to capture gains in a rising equity market environment while the short positions would be expected to profit in a falling market environment.  Because these funds are frequently net long, the direction of fund performance often tracks that of the overall market.

Objective: Participate in market opportunities outside of stocks and bonds, such as in the commodity and currency markets.

  • In 2014, the US dollar appreciated over 10% against its counterparts, and the price of oil fell by almost 50%.  Global macro funds invest across the global markets in equities, fixed income, currencies and commodities on a long and short basis.  Such funds could have had the opportunity to profit from the rally in the US dollar through long US dollar positions, as well as from the decline in oil through short oil positions.

Objective: Cushion portfolio during market swings.

  • One theme I have seen repeatedly mentioned by market analysts is the return of market volatility to normal historic levels.  Over the past six months, we have seen short periods of heightened market volatility, most recently during the first two trading weeks of 2015.  For investors looking to cushion their portfolio during increased market swings, market neutral funds might be appealing options.  Such funds seek to eliminate the impact of broad market movements by trading related stocks on a long and short basis, and seek to generate positive returns regardless of market environment.

Objective: Generate attractive levels of income in the current low interest rate environment.

  • With interest rates at historic lows, many investors, especially retirees, are seeking to earn an attractive level of current income off their investments.  Two places that investors can explore are real estate income funds and bank loan funds.  Real estate income funds invest in global real estate equity and fixed income securities and seek attractive current income.  Bank loan funds seek to provide a high level of current income and capital appreciation by investing in senior loans made to corporations (usually rated below investment grade) by large banks and other financial institutions.

To learn more about alternative investments, visit invesco.com/alternatives.

Important Information

Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus.

There is no guarantee the strategies discussed will meet their investment objectives. Investors should consider their risk tolerance and individual situation and carefully review all financial information before investing.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

Walter Davis Alternatives Investment Strategist Invesco

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

Neutralize the Effects of Rising Interest Rates with a Market Neutral Strategy

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The end of the US Federal Reserve’s bond-buying program, called quantitative easing or QE, is raising concern among investors about what could happen to the value of their bond investments if interest rates were to begin climbing in 2015 and years thereafter.

One potential way to buffer the effects of rising interest rates is to add “market neutral” investment strategies to a traditional stock and bond portfolio. These strategies seek to limit the impact of broad market movements and can offer positive return potential whether markets rise or fall by combining offsetting long and short positions. (Long positions profit when the price of an investment goes up. Short positions are designed to profit when the price of an investment goes down.) The manager’s skill in selecting which positions to go long and which positions to go short will help determine whether the portfolio’s return goals are met.

Traditionally, investors have used market neutral strategies to diversify equity allocations, or hedge equity risk, as they historically have had little or no correlation to stocks or bonds. Because traditional bonds may generate negative returns when interest rates rise, interest-rate sensitive investors have also been turning to market neutral strategies to complement their fixed income holdings.  Market neutral strategies seek to earn returns higher than cash without the interest rate risk — in fact, these strategies may actually benefit from rising interest rates, as their total return would include the higher return on cash.

Key takeaway

Now that the Fed has removed the safety cushion that came with quantitative easing, investors are left to figure out where they can put their money to generate better returns in a potentially rising rate environment.  I believe a market neutral equity investment strategy may give them the return potential they seek.

In general, I believe market neutral strategies can serve as excellent diversification tools by allowing investors to pursue increased returns from assets that respond differently to changing market conditions — such as rising rates.

Invesco Quantitative Strategies has managed market neutral equity portfolios for over 20 years. Learn more about our US and global market neutral mutual funds.

Important Information

Diversification does not guarantee profit or eliminate the risk of loss.

Long positions make money when an investment rises in price.

Short positions make money when an investment falls in price.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. In addition, shorting is subject to increased volatility and can increase an investor’s expenses.

Market neutral strategies use offsetting long and short stock positions in an attempt to limit non-stock-specific risk.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Donna Chapman Wilson

Director of Portfolio Management

Donna Chapman Wilson is a director of Portfolio Management responsible for the client portfolio management team in the US for Invesco Quantitative Strategies (IQS).

IQS manages a variety of equity strategies, including enhanced, active core, low volatility, and long/short, on a regional and global basis. She also serves as a member of IQS’s management team responsible for strategic planning and direction.

Ms. Chapman Wilson has almost 20 years of experience in the investment management industry. She joined Invesco in 1997 and worked with the fundamental growth equity teams before moving to the quantitative strategies team in 1999. Prior to joining Invesco, she held positions with J.P. Morgan, General Motors Asset Management, Mercer Investment Consulting and the Federal Reserve Board of Governors.

Ms. Chapman Wilson earned an MBA in finance from the Wharton School of the University of Pennsylvania and a BA in economics from Hampton University.

Investing in Volatility: Is Asian Volatility Poised to Rise?

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Volatility is cheap these days. That may sound strange at first. But, the Invesco Multi Asset team views volatility as an investable asset type that can be included in our investment strategy. Why might this make sense? We believe volatility can provide additional diversification and return benefits when combined with our portfolio’s other asset exposures. For example, when volatility is low, markets may benefit. But when it rises, markets can come under pressure.

Volatility on sale

Over the past several years, central banks have been heavily involved in markets, which tended to drive asset prices up and volatility down. But we believe volatility is likely to rise from here. Today, global financial markets no longer have the support of the US Federal Reserve’s bond buying stimulus program, known as quantitative easing (QE), and remain uncertain as to when interest rates will rise. Expectations for equity and bond market returns going forward are also less sanguine.

Price check on Asia

We see rising volatility as an opportunity – and an attractive one, at that. On a valuation basis, we believe it’s currently a fairly cheap investment, especially in Asia. Over the longer term, Asian equity markets have been more volatile than those of the US. Yet, we believe current estimates of future volatility levels do not reflect this longer-term relationship. At the same time, the region’s fundamentals are telling us that higher volatility is likely to be realized over time.

To put this theme to work in our portfolio, we made investments in volatility instruments on the Hang Seng and Hang Seng China Enterprise indexes, seeking to take advantage of differences in implied and realized volatility over time. Implied volatility is a forward-looking estimate of an index’s price movement, whereas realized volatility is a backward-looking measure of an index’s actual past volatility. At the same time, we sold a volatility investment on the S&P 500 Index.

If our view on the direction of volatility in Asia versus the US is correct, the portfolio will be paid the difference between the Hang Seng indexes’ realized volatility and the S&P 500 Index’s realized volatility. In other words, the portfolio has the potential to gain from our view that the difference between volatility in the two regions will rise over time.

An unconstrained approach

A central tenet of our investment philosophy is that true diversification comes from an unconstrained approach to asset allocation. When it comes to traditional asset allocation approaches mixing equities, bonds, and other asset types, volatility typically represents how much risk will be embedded in the portfolio.

However, taking a view on the volatility of different asset types, and expressing that view through volatility instruments, means that volatility can be viewed as an asset type in its own right. We believe this is invaluable in terms of diversification and generating distinct return streams.

To learn about our team’s strategy, visit our page for Invesco Global Targeted Returns Fund.

Important Information

Volatility measures the amount of fluctuation in the price of a security or portfolio.

Volatility instruments are financial instruments that track the value of implied volatility of other derivative securities.

The Hang Seng Index is an unmanaged index considered representative of the Hong Kong stock market and includes the largest companies traded on the Hong Kong Exchange.

The Hang Seng China Enterprise Index in an unmanaged index tracking the performance of mainland China companies listed on the Hong Kong Exchange (known as H-shares).

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

Diversification does not guarantee a profit or eliminate the risk of loss.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

David Jubb

Fund Manager

David Jubb joined Invesco Perpetual in March 2013 and serves as a fund manager for the Multi Asset team.

Prior to this, he worked at Standard Life Investments, where he was an investment director of the Multi Asset Investing team, and was one of the fund managers of the firm’s Global Absolute Return investment capability. Mr. Jubb joined Standard Life Group in 1982 as a computer programmer and after a period in the Actuarial Department of Standard Life Canada, he joined Standard Life Investments where he held positions as a fixed income fund manager and strategist before joining the Multi Asset Investing team in 2006.

David Jubb graduated from St Andrews University in 1982 with a BSc (Hons) in mathematics. He is a Fellow of the Institute and Faculty of Actuaries.

Risk parity: It’s about preparation, not predictions

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So far in 2015, there’s been much discussion about oil prices and when they’ll recover, as well as the US Federal Reserve and when interest rates will rise. On top of that are the constant conversations about which stock sectors are poised to outperform. I’m often asked to weigh in on these types of discussions, but my answer always boils down to this:  As a risk-parity manager, I think these are interesting issues, but they don’t affect my team’s investment approach. Risk-parity strategies aim to stay ready for the events that no one is expecting.

To see why this “ready-for-anything” approach is important, let’s briefly review 2014—what investors expected from stocks, bonds and commodities, and what actually took place.

  • Stocks. For many observers, the preferred asset class coming into 2014 was equities. Equities posted robust gains in 2013, and many investors saw no reason to believe that was going to change. However, stocks challenged that notion throughout the year with heightened volatility and several sharp pullbacks. At the end of the year, performance across developed equity markets was largely positive in local currency terms; however, it is hard for us to escape the notion that growth in stock prices had more to do with central bank actions and expectations of more central bank involvement than with a return of robust growth in fundamentals.
  • Bonds. In 2013, blue-chip government bonds suffered their worst annual performance since 2009. Investors reasoned that with the backstop of Fed asset purchases coming to an end and the seeming resurrection of economic growth, bonds stood little chance of rebounding in 2014. As markets are often wont to do, however, bonds defied investor expectations and posted some of the best calendar year returns in history.
  • Commodities. Many investors started 2014 with expectations for growth to rebound and for energy commodities to do well as key inputs into that growth. But as we all know now, energy prices were the big surprise in the commodity space, declining by 40% from the beginning of the year at the complex level.

Spoiling the market’s surprise

Although 2014’s surprises may have been a bit larger than usual, unexpected events in financial markets are nothing new. One thing we can expect every year is that some asset classes will do well while others will struggle, but forecasting exactly what will happen is quite a difficult task.

Consequently, Invesco Balanced-Risk Allocation Fund employs a strategy that seeks to mitigate the effects of negative surprises and take advantage of the opportunities in an efficient and effective way. The aim is to provide investors with a smoother ride through the three phases of the economic cycle — inflationary growth, non-inflationary growth and recession. We strive to achieve this objective in three primary ways:

  1. Each asset class exposure — stocks, bonds and commodities1 — is built by considering the key drivers of return specific to that asset class.
  2. We combine these asset classes based on the amount of risk they may contribute to the portfolio. (Whereas other strategies, such as 60/40 portfolios, allocate a certain percent of capital to each asset class, regardless of their risk contribution.) We believe true diversification is key to limiting downside risk.
  3. Markets move in cycles, so the fund makes tactical adjustments to the portfolio, seeking to take advantage of these cycles, making the portfolio more adaptive to the current environment.

To learn more about my team’s approach, read my previous blogs about Risk Parity: Comparing the Objections With Reality. You can also find more information on the fund page for Invesco Balanced-Risk Allocation Fund.

1 Under normal conditions, the strategy invests in derivatives and other financially-linked instruments whose performance is expected to correspond to U.S. and international fixed income, equity and commodity markets. However, the performance of the asset classes cannot be guaranteed. The derivative investments and enhanced investment techniques (such as leverage) used by the portfolio are subject to greater risks than those associated with investing directly in securities or more traditional instruments.

Important information

Diversification does not guarantee a profit or eliminate the risk of loss. Past performance cannot guarantee future results.

An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

The risks of investing in securities of foreign issuers, including emerging markets, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies.

Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

Scott Wolle, CFA

Portfolio Manager

CIO of Invesco Global Asset Allocation

Scott Wolle is the chief investment officer (CIO) and a portfolio manager for the Invesco Global Asset Allocation team, which invests in stock, bond and commodity markets worldwide.

Mr. Wolle joined Invesco in 1999 as an analyst and portfolio manager, and became a member of the Global Asset Allocation team in 2001. He assumed his current role in 2005. He began his investment management career in 1991 with Bank of America.

Mr. Wolle graduated magna cum laude from Virginia Tech with a degree in finance. He earned an MBA from the Fuqua School of Business at Duke University, with the distinction of Fuqua Scholar. He is a CFA charterholder.

Alternative investing: Why manager skill is crucial to results

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A key attribute of alternative investments is that alternative managers are typically given considerable freedom in how they invest. This freedom means that manager selection — an important consideration for all investors — becomes particularly crucial when investing in alternatives.

Alternatives managers blaze their own path to success

In traditional investing, manager performance is typically benchmarked against a common index, such as the S&P 500. Simplistically speaking, managers seek to beat their index while still investing in the same universe of stocks. US large-cap managers don’t try to outperform the S&P 500 by investing in international small-cap stocks, for example. Rather, they overweight US large-cap stocks they believe will outperform and underweight those they believe will underperform. As a result, their performance generally tracks the index, while their active decisions will cause them to outperform or underperform to a degree.

For alternatives, most strategies lack a common benchmark and most alternative managers have an absolute return orientation — in other words, they seek to deliver positive returns no matter what the stock or bond markets are doing. That’s where freedom comes into play: Alternatives managers often can invest on a long and short basis across a diverse array of markets. They are not expected to stay in a certain “box.” They are expected to find and deliver returns. As a result, the performance of the broader market, as reflected by a benchmark, is not usually the primary driver of an alternative manager’s return. Typically, the biggest driver of alternative managers’ success is their ability to effectively execute their strategy, and that ability varies widely across managers.

Mind the gap: Measuring the difference between top and bottom managers

Taken together, alternative strategies’ lack of traditional benchmarks and emphasis on manager skill result in a wide range of returns across alternative managers. On the other hand, traditional managers’ returns tend to be more tightly grouped around their benchmarks.

To illustrate this distinction, let’s examine the historical gap in performance between top decile and bottom decile managers in both alternative and traditional investment strategies. For the period from 2010 to 2014, the top decile of alternative managers in the Long/Short Equity category returned 11.9% while the bottom decile of managers returned 3.0%; that’s a gap of 890 basis points.1 In contrast, over that same period, the top decile of traditional equity managers in the World Stock category returned 12.1% while the bottom decile managers returned 6.2%, a gap of 586 basis points.1 The performance gap in Long/Short Equity is 1.5 times as large as that in World Stock.

Given the above, manager risk (e.g., the risk of selecting an underperforming manager) is a significant risk when investing in alternatives. It is critical that alternatives investors understand this risk and seek to mitigate it. Part two of this blog will address ways to do this.

Learn more about alternative investing at invesco.com/alternatives.

1 Source: Morningstar. ©2015 Morningstar Inc. All rights reserved. Morningstar does not represent information contained herein to be accurate, complete or timely.

Read more blogs by Walter Davis.

Important information

One basis point equals one one-hundredth of a percentage point.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

Past performance cannot guarantee future results.

Walter Davis

Alternatives Investment Strategist

Invesco

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

Alternative investing: Two ways to mitigate manager risk

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In part one of this blog, Alternative Investing: Why Manager Skill is Crucial to Results, I discussed why manager risk (e.g., the risk of selecting an underperforming manager) is a significant risk when investing in alternatives. Here, I discuss how investors can mitigate manager risk.

Mitigating manager risk involves two things:

  1. Conducting due diligence on the manager before investing. This helps increase an investor’s chances of selecting a successful manager.
  2. Diversifying across multiple managers. This step helps reduce manager risk by diversifying across multiple managers.

Conducting due diligence

When conducting due diligence, it’s important to focus on things such as the experience and pedigree of the manager, the investment process utilized, markets traded, assets under management, capacity of the manager’s strategy, and the infrastructure in place supporting the manager. As part of this process, it’s imperative to clearly identify the manager’s “edge,” namely, the unique aspect of the manager’s approach that will enable him or her to succeed.

A critical aspect of the due diligence process is developing an understanding of what to expect from the manager from a performance standpoint. To this end, an investor should only invest with a manager once they have an understanding of:

  • Expected return and risk.
  • Relationship of returns to traditional markets (e.g., correlation and beta).
  • The market environments that may be most/least favorable for the manager.
  • Expected performance in bull and bear market environments.
  • Expected performance in high/low volatility market environments.

Once the due diligence process is complete, an investor should have a thorough understanding of the manager and be in a position to decide whether or not to allocate to that manager. The due diligence process will also prove helpful when evaluating the manager’s future performance, as the manager can be evaluated against the performance expectations established as a result of the due diligence process.

Diversifying across multiple managers

While a robust due diligence process helps improve the odds of selecting a successful manager, it does not eliminate manager risk. To further mitigate manager risk, investors should diversify their alternatives allocation across multiple managers, ideally across managers that have complementary approaches and relatively low correlation to one another.

Investors can either build their alternatives portfolio piece by piece, or they can consider a multi-alternative fund-of-funds that invests in multiple funds run by multiple managers. In this case, the investor depends on the fund-of-fund manager’s expertise in asset allocation and manager selection.

Talk to your advisor

The two steps discussed above are essential for mitigating manager risk. That said, conducting manager due diligence and diversifying across managers is a tall order for most investors. For this reason, I believe investors would benefit considerably from working with a financial advisor who is knowledgeable and experienced in alternative investments. Such an advisor can help their clients navigate the challenges of investing in alternatives in general, and help mitigate manager risk, in particular.

Learn more about alternative investing at invesco.com/alternatives.

Read more blogs by Walter Davis.

Important information

Correlation is the degree to which to investments move in relation to each other.

Beta is a measure of risk representing how a security is expected to respond to general market movements.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Past performance cannot guarantee future results.

Diversification does not guarantee a profit or eliminate the risk of loss.

Walter Davis

Alternatives Investment Strategist

Invesco

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

MLPs: Providing growth and income potential despite low oil prices

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With oil prices down around approximately 50% since June 2014, investors are increasingly wary of the entire energy sector. Even given this environment, master limited partnerships (MLPs) represent an energy investment that we believe may weather short-term volatility in energy prices, benefit from the US’s long-term infrastructure needs, and provide attractive income potential for investors.

To understand why, let’s take a quick tour of the US oil patch.

US production growth is slowing

Simply put, oil prices crashed because supply currently exceeds demand. With OPEC refusing to cut production to bring supply and demand more into balance (as it has done in the past), US exploration and production (E&P) companies are abandoning higher-cost projects and consolidating their activity around lower-cost wells. Rig counts have dropped 50% year-over-year,1 and capital expenditures for E&P companies are down 40% this year versus 2014.2

What’s the expected result on US oil and natural gas production? Due to the momentum of backlogged projects in 2014, production is still expected to grow overall, but the rate of growth is slowing. The Energy Information Administration projects US crude oil production to increase from an average of 8.7 million barrels a day in 2014 to 9.2 million in 2015, and to stay virtually level at 9.3 million in 2016.3 It expects natural gas production to grow by 5% in 2015 and 1.9% in 2016.3

Fee-based contracts have largely shielded MLPs from the impact

While a small number of MLPs operate in the E&P (or “upstream”) space, the majority of MLPs are in the “midstream” market, which includes pipelines, rail and truck transportation, and other assets that lie between the producing fields and the end users. MLP security prices have not been immune to the crash in oil prices, but the impact has been much less severe in midstream than in upstream. In contrast to E&P companies, so far this earnings season MLPs have only reduced their earnings guidance by an average of 3%, distribution growth by an average of 0.74% and growth capital by an average of 8%.4

For the 20 largest MLPs, distribution per unit (DPU) estimates for 2015 have come down 1% since September 2014, and 2016 DPU growth estimates have declined 0.14% — but are still a healthy 12.1%.5

Why are MLPs faring this well, given the steep cuts in E&P activity?

  • MLP cash flow largely comes from fee-based contracts with minimum volume commitments and take-or-pay stipulations. Because of this business structure, their commodity-price exposure is more modest than that of E&P companies.
  • 2015 growth in the MLP space is predicated on projects that are already secured or completed.

Drilling deeper into MLP performance

While MLPs may be attractive as a sector, it is critical for investors to understand that there are important differences between — and even within — MLP sub-sectors. These differences illustrate the value that active management can provide to MLP investors. For example:

  • Liquid Transportation & Services MLPs expect their DPU to grow an average of about 15% in 2015. This expectation has remained consistent both before and after fourth-quarter 2014 earnings reports.6
  • Upstream MLPs, on the other hand, have a deteriorating outlook. Before the fourth-quarter earnings announcements, Upstream MLPs expected their DPU to fall an average of 44% in 2015. Since then, they’ve revised that expectation to 48%.6
  • Company-specific differences can be dramatic. Within the Gathering & Processing space, DCP Midstream Partners LP cut its expected DPU growth rate from 6.6% to 3.8%, while Western Gas Partners LP issued a much smaller revision, from 16.2% to 15.1%.6 (0.00% and 2.79% of Invesco MLP Fund, respectively, as of March 31, 2015.)

Questions for 2016

As we gain further clarity on 2015 expectations, questions do remain for 2016. Trends that could greatly impact MLP growth next year and beyond:

  • On the downside, if commodity prices do not show some form of recovery and volume projections come down further, that will create headwinds for midstream company growth in 2016.
  • Conversely, there are still a significant number of midstream assets that are owned by publicly traded E&P companies as well as private equity firms. These assets could be acquired by existing MLPs or spun off into new MLPs if E&P companies continue to need additional capital, representing potential future growth for the industry.

Conclusion

The long-term outlook for MLPs should transcend short-term oil price fluctuations, and the proper selection of MLPs can still be a means of generating income with the potential for attractive total returns over the long term.

Currently, MLPs are yielding 6.1% versus 3.4% for real estate investment trusts, 3.5% for utility stocks, 2.7% for consumer staples stocks and 1.9% for 10-year Treasuries.7 This compares to the past five years where MLPs on average have yielded 3.4% above 10-year Treasuries.7

For income-seeking investors, these numbers could prove to be an attractive entry point. Talk to your financial advisor to discuss how MLPs may fit into your portfolio.

Ready to learn more about MLPs?

1 Source: US Capital Advisors, March 13, 2015

2 Source: Wells Fargo, March 6, 2015

3 Source: Energy Information Administration, April 7, 2015

4 Source: Wells Fargo, March 9, 2015

5 Source: US Capital Advisors

6 Source: UBS, March 6, 2015

7 Source: Bloomberg L.P. as of March 31, 2015. MLPs represented by the Alerian MLP Index. REITs by the FTSE NAREIT All Equity REITs Index. Utility stocks by the MSCI US Utilities Index and consumer staple stocks by the MSCI US Consumer Staples Index.

Important information

Generally MLPs’ partnership agreements require a quarterly cash distribution to unit holders. Distribution per unit (DPU) equals the total cash distributions paid divided by an MLP’s number of outstanding units.

As a “C” corporation, the fund is subject to US federal income tax on its taxable income at the graduated rates applicable to corporations, as well as state and local income taxes. The fund will not benefit from the current favorable federal income tax rates on long-term capital gains and Fund income, losses and expenses will not be passed through to the shareholders.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

A change in current tax law, or a change in the underlying business mix of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes. This would result in such MLP being required to pay U.S. federal income tax on its taxable income and could result in a reduction of the value of the MLP.

The fund is considered non-diversified and may experience greater volatility than a more diversified investment.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Joe Rodriguez

Managing Director

Head of Global Real Estate Securities

Invesco Real Estate

In addition to portfolio management, Mr. Rodriguez is a managing director and the head of real estate securities for Invesco Real Estate, where he oversees all phases of the unit, including securities research and administration.

Mr. Rodriguez began his investment career in 1983 and joined Invesco Real Estate, the Dallas-based investment management affiliate of Invesco Institutional (N.A.), Inc., in 1990. He has served on the editorial board for the Financial Times Stock Exchange National Association of Real Estate Investment Trusts (FTSE NAREIT), as well as the editorial board of the Institutional Real Estate Securities newsletter. He is a member of the National Association of Business Economists, American Real Estate Society and the Institute of Certified Financial Planners. He has also served as adjunct professor of economics at The University of Texas at Dallas.

In addition, Mr. Rodriguez was a contributing author to Real Estate Investment Trusts: Structure Analysis and Strategy, published by McGraw-Hill. He made contributions as editor and author to several industry publications, and has been featured as a real estate expert by both financial industry print and television media such as CNBC and Bloomberg News.

Mr. Rodriguez earned a Bachelor of Business Administration degree in economics and finance as well as an MBA in finance from Baylor University.

Darin Turner

Portfolio Manager

Darin Turner is a portfolio manager and member of the Real Estate Securities Portfolio Management and Research team with Invesco Real Estate. His current duties involve evaluating structured real estate securities with a focus on fixed income instruments such as commercial mortgage-backed securities, corporate debt and corporate preferred stock. He also provides tenant and credit-quality analysis, capital-structure analysis and debt-pricing analysis for equity portfolios. He joined Invesco in 2005 as an acquisitions analyst for direct property investments and later served as an associate portfolio manager for Invesco Real Estate.

Mr. Turner has been in the industry since 2003 and previously was a financial analyst in the corporate finance group at ORIX Capital Markets.

Mr. Turner earned a BBA in finance from Baylor University, an MS degree in real estate from the University of Texas at Arlington and an MBA specializing in investments from Southern Methodist University.

Walter Stabell III

Senior Client Portfolio Manager*

Walt Stabell entered the industry in 1986, and his experience includes 17 years as a portfolio manager. He currently serves as a senior client portfolio manager with Invesco’s Product Strategy and Investment Services Group. In this capacity, he works with Invesco’s real estate, energy and convertible securities fund management teams acting as their representative to consultants as well as institutional and retail clients around the world.

His responsibilities include client relationship management, client service and assisting the various sales teams with new client development.

Prior to joining Invesco in 2006, Mr. Stabell served as a senior vice president and senior portfolio manager for Compass Bank overseeing a variety of investment portfolios. Prior to joining Compass in 2003, he worked as a senior portfolio manager of fixed income investments for Vaughan, Nelson, Scarborough & McCullough, L.P. Mr. Stabell began his investments industry career in 1986 as a securities analyst for United Savings of Texas. From 1986 through 1999, he worked for Van Kampen Asset Management, the final nine years as a fixed income portfolio manager.

Mr. Stabell earned a Bachelor of Business Administration degree in accounting from Texas A&M University.

*Does not manage the assets for any fund.

 


Risk parity: Reducing our bond exposure

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Every month, the portfolio management team for the Invesco Balanced-Risk Allocation strategy examines the market’s signals for stocks, bonds and commodities, and makes tactical adjustments in an effort to enhance returns. In recent weeks, our tactical signals for government bonds have led us to substantially reduce our exposure and adopt an underweight position.    

How does the strategy work?

In a nutshell, our strategy seeks to be prepared for any economic environment by investing in three major asset classes1, and weighting them according to their risk contribution to the portfolio (not by dollar amounts):

  • Commodities have historically performed well in inflation-driven markets.
  • Stocks have outperformed in times of noninflationary growth.
  • Government bonds may provide a measure of defense against recessionary/deflationary periods.

Our strategic allocation balances the risk contribution of each asset class to the portfolio, based on historical risk and correlations as well as proprietary factors that we use as more forward-looking risk estimates. Our monthly tactical adjustments seek to take advantage of market cycles, allowing us to not only alter the targeted risk contribution in the strategy, but also the overall targeted level of risk. However, when setting the tactical risk allocation, we work within specified risk contribution ranges — each asset class may represent between 16% and 50% of the strategy’s risk level.

What are our tactical signals telling us now?

When making tactical adjustments to our bond allocation, we examine valuations, the economic environment and price trends. Recently, weakening price momentum, along with a rebound in commodity prices and slightly better economic data points, have dented the appeal for high-quality government bonds. In particular:

  • After the substantial drop in bond yields since the beginning of the year, all government bond markets used within the strategy are trading at very lofty levels based on our valuation framework.
  • After a sharp contraction in commodity prices since June 2014, particularly within the energy complex, prices have started to rebound, resulting in rising inflation expectations in the US.

At the same time, within the eurozone, consumer-price readings have stabilized at zero after falling into negative territory during the last few months. This development, along with somewhat firmer economic data points, has bolstered hopes that the European Central Bank’s bond buying program will lift economic growth and keep persistent deflation at bay.

Price trends have weakened as well, particularly during the last week of April.

These signals led us to reduce our risk exposure to bonds during our tactical adjustment process on May 1. We will undergo our next adjustment on June 1.

To learn more about my team’s approach, read my previous blog: Risk Parity: It’s About Preparation, Not Predications. You can also find more information on the fund page for Invesco Balanced-Risk Allocation Fund.

Important Information

1 Under normal conditions, the strategy invests in derivatives and other financially linked instruments whose performance is expected to correspond to U.S. and international fixed income, equity and commodity markets. However, the performance of the asset classes cannot be guaranteed.

Diversification does not guarantee a profit nor eliminate the risk of loss.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Obligations issued by US Government agencies and instrumentalities may receive varying levels of support from the government, which could affect the fund’s ability to recover should they default. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

Stock and other equity securities values fluctuate in response to activities specific to the company as well as general market, economic and political conditions.

Scott Wolle, CFA

Portfolio Manager

CIO of Invesco Global Asset Allocation

Scott Wolle is the chief investment officer (CIO) and a portfolio manager for the Invesco Global Asset Allocation team, which invests in stock, bond and commodity markets worldwide.

Mr. Wolle joined Invesco in 1999 as an analyst and portfolio manager, and became a member of the Global Asset Allocation team in 2001. He assumed his current role in 2005. He began his investment management career in 1991 with Bank of America.

Mr. Wolle graduated magna cum laude from Virginia Tech with a degree in finance. He earned an MBA from the Fuqua School of Business at Duke University, with the distinction of Fuqua Scholar. He is a CFA charterholder.

Concerned about rising interest rates? Consider these four alternative investments

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As I travel across the country meeting with financial advisors and their clients, a common concern I hear voiced is “how can I position my portfolio for when the inevitable happens and interest rates start to rise?” In response, I state that certain types of alternative investments are well suited to help prepare portfolios for rising interest rates in the future, while also potentially adding value in the present.

Specifically, I highlight four different types of alternatives for clients to consider:

  • Senior loans (also known as bank loans, senior secured loans and/or leveraged loans) – Senior loans are loans made by banks to non-investment grade companies, commonly in relation to leveraged buyouts, mergers and acquisitions. The loans are called “senior” because they are contractually senior to other debt and equity, and are typically secured by collateral.

Given that the loans are made to non-investment grade companies, the yield associated with them tends to be higher than on investment grade corporate bonds.1 For example, as of the end of May, senior loans were yielding 5.51% versus a yield of 2.99% on investment grade corporate bonds.2

Another key aspect of senior loans is that the interest rate paid is a floating rate that resets every 30 to 90 days.3 This means that in a rising interest rate environment, as long as the rate rises above a predetermined minimum level, the investor will receive increased payments from the borrower. Therefore, senior loans may potentially outperform other types of bonds in rising rate environments due to their floating rates.

Invesco offers three different senior loan investments strategies for individual investors: Two mutual funds, Invesco Floating Rate Fund with daily liquidity and Invesco Senior Loan Fund with monthly liquidity; and PowerShares Senior Loan Portfolio as an exchange-traded fund (ETF) option.

  • Unconstrained bond funds – Unconstrained bond funds are funds in which the portfolio manager is given the flexibility to invest globally across all sectors of the fixed income markets. The manager also may use derivatives, leverage and shorting when implementing his or her strategy. Given the tools made available to the manager, unconstrained bond funds tend to have an absolute return orientation, meaning that they may seek to generate a positive return in any market environment.

In a rising interest environment, an unconstrained bond fund has the ability to take advantage of rising rates by utilizing a number of derivative strategies. One such strategy would be to short Treasury bond futures. Treasury bond futures mimic the returns of Treasuries, which are negatively impacted by rising rates. Therefore, by shorting Treasury futures you would gain when interest rates rise. Furthermore, such funds have the ability to avoid regions and sectors that they do not find attractive while focusing on the regions and sectors they believe offer the best potential for success. In general, investors should expect unconstrained bond funds to potentially outperform traditional bond funds in down bond markets, and to possibly underperform traditional bond funds in rising bond markets.

Invesco Unconstrained Bond Fund is a mutual fund available to individual investors.

  • Market neutral funds – Market neutral funds seek to generate positive returns regardless of market environment by trading related stocks on a long and short basis. Such funds are designed to cushion a portfolio against broad market swings.

Although market neutral funds invest in equities, many of these funds are designed to generate returns that are bond like, both in terms of the level of return and the volatility associated with the return. That said, investors considering market neutral funds should be aware that such funds, unlike traditional bond funds, do not generate current yield, and that they can experience more severe declines than traditional bond funds.

For investors looking for a fund that potentially will generate bond like returns while not being subject to interest rate risk, market neutral funds such as Invesco Global Market Neutral Fund, might be an appealing option.

  • Global macro funds – Global macro funds are funds that invest across the global markets in equities, fixed income, currencies and commodities on a long and short basis. As a result, these funds tend to be very opportunistic in their investment approach.

When interest rates begin to rise, the fallout is likely to be felt across the global markets. Given the markets traded and their opportunistic nature, global macro funds have the potential to thrive in a rising interest rate environment.

Invesco Global Targeted Returns Fund and Invesco Global Markets Strategy Fund are examples of global macro funds.

Read more blogs about alternative investing from Walter Davis.

1 This is due to the increased credit risk associated with non-investment grade companies relative to investment grade companies.

2 Source: Bloomberg L.P. as of May 31, 2015. Corporate bonds are represented by a subset of the Barclays US Aggregate Bond Index, and senior loans are represented by the S&P/LSTA Leveraged Loan Index.

3 Senior loans are usually priced relative to three-month LIBOR, with the lender receiving a fixed spread above the LIBOR rate. Therefore as LIBOR rises, the amount paid by the borrower increases. Importantly, most loans have a provision that establishes a minimum, or floor, for LIBOR. Typically the floor rate is around 1.00%. This helps protect the lender should LIBOR fall below 1.00%. Currently, the three-month LIBOR rate is approximately 0.28%. Due to the floor, LIBOR would need to rise above the 1.00% floor before the investor would receive the benefit of rising interest rates.

Important information

The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans.

An investment cannot be made in an index. Past performance cannot guarantee future results.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

Walter Davis

Alternatives Investment Strategist

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

 

Bridging the gap in global infrastructure funding

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This two-part series examines the expanding capital requirements for infrastructure globally as developed markets confront ongoing replacement needs, and the urbanization of emerging markets place additional stress on the existing foundation. This first part looks at sources of funding, and the second part will explore what this macro trend may mean for investors.

Infrastructure is the backbone of every economy, providing essential public services such as water supply, energy and mobility. And for investors, infrastructure also has the potential to provide unique benefits. In general:

  • Infrastructure assets, such as airports, ports, railroads and water utilities, tend to have long useful lives, generating cash flow over a long duration — sometimes a century or more.
  • Demand for infrastructure is relatively independent of business cycles. Therefore, assets tend to produce regular, stable cash flows that allow pricing adjustments for rising inflation rates. Fees for using a toll road or a pipeline, for example, are normally linked to an inflation rate.
  • Infrastructure assets essentially operate as quasi-monopolies — for example, electric transmission lines — with little or no competition because the upfront investment for construction is substantial and usually irreversible.

Sweeping need, scarce funding

There is a crucial, expanding demand for infrastructure around the globe. Emerging economies need infrastructure to support increased urbanization as well as the expansion of the middle class. Developed countries need investment for upgrading and improving existing aging infrastructure, which often has become inadequate to support current demand. Current estimates place the global infrastructure investment need at $58 trillion. To put this number in perspective, worldwide gross domestic product (GDP) was almost $75 trillion in 2013, as the chart shows.1

Global infrastructure investment need is estimated at $58 trillion

Global infrastructure investment need

1 OECD telecom estimate covers only OECD members plus Brazil, China and India.
2 Energy estimate through 2025.
Source: OECD; IHS Global Insight; GWI; IEA; McKinsey Global Institute analysis; and World Bank. Data as of January 2013. GDP data as of June 30, 2014. There is no guarantee that the projections shown will come to pass.

In the US in particular, lack of government spending has left infrastructure assets in poor shape. As you can see from the infrastructure “report card” from the American Society of Civil Engineers, the spending gap between infrastructure funding and needed improvements was a staggering $3.6 trillion in 2013. That number is expected to grow to $10 trillion by 2040.2

Grading US infrastructure: D+ with a $3.6 trillion spending gap

Grading US infrastructure

Source: American Society of Civil Engineers
*The First infrastructure grades were given by the National Council on Public Works Improvements in its report Fragile Foundations: A Report on America’s Public Works, released in February 1988. ASCE’s first Report Card for America’s Infrastructures was issued a decade later.

With the national debt just over $18 trillion,3 the federal government has limited resources to close that infrastructure funding gap, which has been building over the last decade with a notable decrease in federal as well as in state and local government infrastructure spending.4 More significantly, the last decade saw a decrease of 23% in capital expenditures for infrastructure, while operations and maintenance spending increased 6% over the last decade.5

Bridging the gap

The use of private funds in public works is quite common outside the US. For example, TransUrban Group, a publicly traded Australian company, develops and manages almost all the country’s toll roads, including the Cross City Tunnel, which is strategically located to reduce travel time to the Sydney Airport and, by extension, increase toll revenues for TransUrban shareholders.

Most airports outside the US are publicly listed and post significant earnings from their retail business tenants as well as from airline passenger fees. Earlier this year, Spain’s government announced the initial public offering (IPO) of 28% of Aena, the world’s largest airport operator by passenger volume.6 In addition to the IPO, the government planned to sell a 21% stake in Aena to private investors. Although Aena will remain state owned with a 51% majority stake, the government expects to reap $4.5 billion from the minority interest sale.

The US appears to be slowly following suit, although public-private partnerships are considered the new rather than the norm. The Port Authority of New York & New Jersey, for example, recently announced an “innovative public-private partnership” for the redevelopment of the LaGuardia Airport to create a central arrival and departure portal. LaGuardia Gateway Partners, the private investor, will contribute $2 billion and the Port Authority $1 billion to fund the project, which promises premier shopping, dining and business amenities; additional parking with a cell phone lot; and capacity for a hotel and rail connecting LaGuardia Airport to the subway.7

At Invesco Real Estate, we believe governments will look increasingly to private companies to bridge the infrastructure spending gap. These partnerships could prove particularly essential in countries with significant budget deficits and dire infrastructure needs, such as the US.

1 Source: OECD; IHS Global Insight; GWI; IEA; McKinsey Global Institute analysis; Oxford Economics

2 Source: American Society of Civil Engineers

3 Source: US Debt Clock.org

4 Source: Congressional Budget Office

5 Source: Congressional Budget Office

6 Source: Aena

7 Source: The Port Authority of New York & New Jersey

Important information

Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.

Darin Turner

Portfolio Manager

Darin Turner is a portfolio manager and member of the Real Estate Securities Portfolio Management and Research team with Invesco Real Estate. His current duties involve evaluating structured real estate securities with a focus on fixed income instruments such as commercial mortgage-backed securities, corporate debt and corporate preferred stock. He also provides tenant and credit-quality analysis, capital-structure analysis and debt-pricing analysis for equity portfolios. He joined Invesco in 2005 as an acquisitions analyst for direct property investments and later served as an associate portfolio manager for Invesco Real Estate.

Mr. Turner has been in the industry since 2003 and previously was a financial analyst in the corporate finance group at ORIX Capital Markets.

Mr. Turner earned a BBA in finance from Baylor University, an MS degree in real estate from the University of Texas at Arlington and an MBA specializing in investments from Southern Methodist University.

 

An alternative asset class you may take for granted

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This two‐part series examines the expanding capital requirements for infrastructure globally as developed markets confront ongoing replacement needs, and the urbanization of emerging markets places additional stress on the existing foundation. This second part explores what this macro trend may mean for investors. The first part: Bridging the gap in global infrastructure funding.

Infrastructure is an integral part of your daily life — you drive on it, depend on it for electricity and water, and use it to communicate on your cell phone. But have you considered investing in it? Infrastructure investment can offer several potential benefits to an overall portfolio.

Established track record

Infrastructure comprises long-lived assets in industries with high barriers to entry, typically supported by resilient demand for essential services. While “infrastructure as asset class” is a comparatively new concept in the US, it has an established track record in other countries. In the UK, Canada and Australia, infrastructure has been considered its own asset class for some time. Consider two successful examples:

  • England and Wales privatized their water assets in 1989 by selling 10 publicly owned water companies and launching a new regulator. Nearly a decade later, The World Bank Group summarized the results: “These reforms have delivered an impressive volume of new investment, full compliance with the world’s most stringent drinking water standards, a higher quality of river water, and a more transparent water pricing system.”1
  • In Australia, many toll roads, ports and airports are privatized. A study conducted by the Allen Consulting Group and the University of Melbourne found that infrastructure built through public-private partnerships tended to have fewer cost and time overruns when compared with traditional public-only projects.2

Dynamic, growing asset class

Over the past 10 years, total net assets in Lipper’s Global Infrastructure Funds Category have swelled from below $150 million to over $15 billion currently.3 Overall investor interest in infrastructure could continue to grow for several reasons, including:

  • The possibility for increased securitization of infrastructure assets resulting from the pervasive public funding gap confronting many nations today.
  • The current shift toward including alternative investments, such as real estate and infrastructure, in traditional stock/bond portfolios.
  • Investors’ search for alternative sources of yield and diversification in a low interest rate environment.

Benefits for investors

Global infrastructure has historically provided competitive total returns relative to broad markets. For the 10 years ended June 30, 2015, the Dow Jones Brookfield Global Infrastructure Index returned 10.4% in average annual returns versus the MSCI World Index return of 6.4%.4 Equally compelling, a significant portion of infrastructure returns comes from recurring income. The current dividend yield on the Dow Jones Brookfield Global Infrastructure Index is 3.7% versus 2.5% for the MSCI World Index.5

Moreover, the contractual nature of infrastructure cash flows tends to both enhance their predictability and lower financial risk, thus potentially boosting the risk-adjusted performance of the asset class. Global infrastructure has experienced 13% annual dividend growth in the years following the Great Recession, compared with 3% and 1% annual dividend growth for global stocks and global real estate, respectively.6 The path of dividend growth is important as well. As the chart below shows, infrastructure has experienced annual consecutive growth since 2008 — even in 2009, when dividends on both global stocks and global real estate shrank.

Infrastructure has experienced annual dividend growth since the Great Recession

Infrastructure dividend growth since the Great Depression

Source: Invesco Real Estate estimates as of Dec. 31, 2014, Bloomberg L.P. Global real estate is represented by the FTSE EPRA/NAREIT Developed REITs Index; global infrastructure is represented by Dow Jones Brookfield Global Infrastructure Index; and global stocks are represented by MSCI World. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

Finally, Infrastructure has provided inflation-hedging and diversification characteristics historically. In a review of inflationary periods — defined as the US consumer price index above 2.5% — US infrastructure stocks outperformed US stocks by 6.5% annualized.7 Additionally, correlation of global infrastructure relative to US fixed income is low at 0.27.8

I believe these potential benefits make a compelling case for considering an investment in the infrastructure that you likely take for granted every day.

Read the first part of Investing in infrastructure: Bridging the gap in global infrastructure funding

1 Source: The World Bank Group, Public Policy for the Private Sector, “Water Privatization and Regulation in

England and Wales, May 1997

2 Source: Infrastructure Partnerships Australia, “Performance of PPPs and Traditional Procurement in Australia,” November 2007

3 Source: Lipper, as of June 30, 2015

4 Source: Invesco Real Estate, Zephyr StyleADVISOR, as of June 30, 2015

5 Source: Bloomberg L.P., as of June 30, 2015

6 Source: Invesco Real Estate, Bloomberg L.P., as of December 31, 2014

7 Source: Invesco and Zephyr, as of December 31, 2014. US infrastructure average calculated using a simple average of annual returns of the S&P 600 Water Utilities, the S&P 500 Utilities Sector, and the S&P 500 Road and Rail indexes. US stocks represented by the S&P 500 Index.

8 Source: Zephyr StyleADVISOR, from January 2003 to June 2015, based on the Dow Jones Brookfield Global Infrastructure

Index correlation relative to US equities (the S&P 500 Index) and US fixed income (Barclay’s US Aggregate Index)

Important information

Dividend yield is the amount of dividends paid over the past year divided by a company’s share price.

Correlation is the degree to which two investments have historically moved in relation to each other.

The FTSE EPRA/NAREIT Developed Index is an unmanaged index considered representative of global real estate companies and REITs.

The MSCI World Index is an unmanaged index considered representative of stocks of developed countries.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The consumer price index measures the prices consumers pay for a basket of consumer-based goods and services.

The Lipper Global Infrastructure Funds Category represents all funds Lipper deems global infrastructure funds.

The Dow Jones Brookfield Global Infrastructure Index measures the stock performance of companies that exhibit strong infrastructure characteristics.

Barclay’s US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The S&P 600® Water Utilities Index is a float-adjusted, market-capitalization-weighted index representing the US small-cap market water utilities industry.

The S&P 500® Utilities Sector Index is an unmanaged index considered representative of the utilities market.

The S&P 500® Road Index is an unmanaged index considered representative of US toll road stocks.

The S&P 500® Rail Index is an unmanaged index considered representative of US rail stocks.

Diversification does not guarantee a profit or eliminate the risk of loss.

Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.

Darin Turner

Portfolio Manager

Darin Turner is a portfolio manager and member of the Real Estate Securities Portfolio Management and Research team with Invesco Real Estate. His current duties involve evaluating structured real estate securities with a focus on fixed income instruments such as commercial mortgage-backed securities, corporate debt and corporate preferred stock. He also provides tenant and credit-quality analysis, capital-structure analysis and debt-pricing analysis for equity portfolios. He joined Invesco in 2005 as an acquisitions analyst for direct property investments and later served as an associate portfolio manager for Invesco Real Estate.

Mr. Turner has been in the industry since 2003 and previously was a financial analyst in the corporate finance group at ORIX Capital Markets.

Mr. Turner earned a BBA in finance from Baylor University, an MS degree in real estate from the University of Texas at Arlington and an MBA specializing in investments from Southern Methodist University.

Alternative investments: Helping investors weather the current market storm

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The recent sharp sell-off in global equity markets has focused investors on the importance of holding diversifying investments that can help mitigate volatility and potentially cushion their portfolios during times of market stress. Given their unique nature, alternative investments are proving to be useful tools to help investors weather the current market storm.

As the chart1 below illustrates, a basket of alternatives — based on Invesco’s alternatives framework as explained in my previous blog post How to approach the alternative investments puzzle — has historically delivered equity-like returns with low levels of volatility (as measured by standard deviation) and lower maximum drawdown.

Alternatives have historically helped investors manage market volatility

Alternatives to help manage market volatility

The period represented is January 1997 through June 2015. Past performance is not a guarantee of future results.

Bull and bear market performance

If we drill down a little further to look at alternatives’ performance during different parts of the market cycle (see the chart1 below), you can see that alternatives have historically outperformed equities during periods of equity weakness, while equities have historically outperformed alternatives during periods of equity strength. This has proven to be the case: Alternatives lagged equities during the post-crisis bull market, while they have outperformed equities on a year-to-date basis in 2015.2

Alternatives have historically outperformed during bear markets

Alternatives have historically outperformed during bear markets

Alternatives on the defense

Among the wide variety of alternative investments, some play offense by helping investors build wealth, while others play defense by helping preserve wealth. Given recent market events, these three types of alternatives may be appealing options for investors:

  1. Market neutral funds, which help cushion portfolios against market swings and mitigate downside risk. Such funds trade related3 equities on a long and short basis so that the fund’s net exposure to the market and its beta are both close to zero. The key to generating a positive return is stock selection — determining which equities to go long and which to go short. Market neutral funds seek to generate positive returns across all market cycles. Invesco All Cap Market Neutral Fund and Invesco Global Market Neutral Fund are examples of market neutral funds.
  2. Long/short equity funds, which hedge equity exposure while providing the potential to participate in equity market upside with the possibility for some downside protection. Allowing investors to participate in the equity markets on a hedged basis, these funds combine both long and short equity positions in a portfolio, while typically being net long to equities. As a result, fund performance often tracks that of the overall equity market, but the fund would be expected to underperform during a rising equity market (due to potential losses on the fund’s short equity positions) and outperform during a falling equity market (due to potential gains on the fund’s short equity positions). Invesco Long/Short Equity Fund and Invesco Macro Long/Short Fund are examples of long/short funds.
  3. Global macro funds, which invest opportunistically on a long and short basis across the global equity, fixed income, currency and commodity markets. Because they invest opportunistically, global macro funds have the ability to determine which markets they want to participate in and which to avoid. Because these funds have the ability to invest on both a long and short basis, they have the potential to achieve profits in both rising and falling market environments. Invesco Targeted Returns Fund and Invesco Global Markets Strategy Fund are examples of global macro funds.

Diversification is key in times of volatility, and alternative investments offer a variety of strategies to help investors potentially build and preserve wealth over the long term.

Read more expert views on market volatility.

1 Source: StyleADVISOR. Alternatives are represented by a portfolio comprising equal allocations to alternative assets, represented by FTSE NAREIT All Equity REIT Index, Bloomberg Commodity Index; relative value strategies, represented by BarclayHedge Equity Market Neutral Index; global investing and trading strategies, represented by BarclayHedge Global Macro Index, BarclayHedge Multi Strategy Index and BarclayHedge Currency Traders Index; alternative equity strategies, represented by BarclayHedge Long/Short Index; and alternative fixed income strategies, represented by Credit Suisse Leveraged Loan Index, HFN Fixed Income Arbitrage Index and BarclayHedge Fixed Income Arbitrage Index. The performance of individual alternative investments will differ from that of the index. Equities represented by the S&P 500 Index. Fixed Income represented by the Barclays US Aggregate Bond Index. Traditional 60/40 Portfolio represented by 60% S&P 500 Index and 40% Barclays US Aggregate Bond Index. An investment cannot be made directly in an index.

2 As of Aug. 24, 2015, every Morningstar Alternatives Fund Category is out performing the S&P 500 Index on a year-to-date basis.

3 Stocks are related if they are driven by the same fundamental factors; for example, two stocks from the same industry.

Important information

Diversification does not guarantee a profit or eliminate the risk of loss.

BarclayHedge indexes reflect performance of hedge funds, not of retail investment strategies, and are used for illustrative purposes only solely as points of reference in evaluating alternative investment strategies.

Hedge funds are typically aggressively managed portfolios of investments for high net worth investors that use advanced investment strategies such as leverage, long, short and derivative positions with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hedge fund managers have less restriction on their investment methodologies than mutual fund managers, and hedge funds are less regulated and therefore offer less investor protection than mutual funds. Mutual funds are more transparent with regard to disclosure of underlying holdings and have lower fees than hedge funds.

The BarclayHedge Equity Market Neutral Index includes funds that attempt to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country.

The BarclayHedge Global Macro Index includes funds that carry long and short positions in any of the world’s major capital or derivative markets.

The BarclayHedge Multi Strategy Index includes funds that are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines.

The BarclayHedge Currency Traders Index is an equal-weighted composite of managed programs that trade currency futures and/or cash forwards in the interbank market.

The BarclayHedge Long/Short Index includes funds that employ a directional strategy involving equity-oriented investing on both the long and short sides of the market.

The BarclayHedge Fixed Income Arbitrage Index includes funds that aim to profit from price anomalies between related interest rate securities.

The FTSE NAREIT All Equity REITs Index is an unmanaged index considered representative of US REITs.

The Bloomberg Commodity Index is a broadly diversified commodity price index.

The Credit Suisse Leveraged Loan Index represents tradable, senior-secured, US-dollar-denominated, noninvestment-grade loans.

The HFN Fixed Income Arbitrage Index includes funds that attempt to exploit pricing inefficiencies between credit sensitive instruments which may include government or corporate debt, structured securities and their related derivatives.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

Stock and other equity securities values fluctuate in response to activities specific to the company as well as general market, economic and political conditions.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Diversification does not guarantee profit or eliminate the risk of loss.

Standard deviation measures a portfolio’s range of total returns and identifies the spread of a portfolio’s short-term fluctuations.

A drawdown is the largest cumulative percentage decline in net asset value as measured on a month-end basis.

Downside risk is the maximum decline based on the month-end value of an index or portfolio.

Long positions make money when an investment rises in price.

Short positions make money when an investment falls in price.

Beta is a measure of risk representing how a security is expected to respond to general market movements.

A hedge is an investment made to reduce the risk of adverse price movements in a security by taking an offsetting position in a related security.

Walter Davis

Alternatives Investment Strategist

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

A time to reflect — not react

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China’s attempts to shore up its domestic growth through currency devaluations and aggressive monetary stimulus have unnerved many investors around the globe. As a result of this and other macroeconomic events like the drop in oil prices and the uncertainty surrounding rate lift-off in the US, equity markets have sold off sharply and volatility has spiked. On Aug. 17, the CBOE Volatility Index (VIX) was around 13; just one week later, however, it had jumped to nearly 411 – a level last seen in October 2011 during the eurozone sovereign debt crisis.

These extreme short-term gyrations can be quite stressful, but are an excellent time to reflect, not react. The investing horizon for most investors is measured in years, if not decades — not days. Therefore, it is most appropriate — and fiscally responsible — to consider the implications of risk over a time frame that extends beyond today’s headlines.

A long-term view of risk

Within Invesco Quantitative Strategies, we have been managing risk as well as return for over 30 years. Throughout that time we have quite deliberately used models that forecast risk over a longer horizon in all our equity strategies. This has led to more stable risk profiles in those strategies because long-term average volatility is simply easier to predict — and therefore manage — than short-term volatility. It’s a bit like the weather. I can’t tell you if it will rain next Friday, but I can tell you with a high degree of certainty that we’ll get an average of about three inches of rain over the summer months.

Reacting to short-term volatility and chasing the accompanying trends can be quite dangerous. First, it’s a certainty that the incremental turnover and related transaction costs will eat into your portfolio’s returns. Second, and even more importantly, there’s a very good chance that you will get whipsawed by the sharp moves — selling after prices have already fallen, and buying back after prices have reverted to former levels. Rather than fret about the right tactical decisions to make against a rapidly shifting backdrop, these times are a good opportunity to reflect on your strategic allocations. Is my risk properly balanced and diversified across strategies? Am I getting the diversification I thought I had? Are there strategies to consider that have historically performed well during stressed market conditions?

Compared to the longer market history, investors have enjoyed a generally low level of volatility since 2012. This may have led to some complacency regarding strategic asset allocation decisions. Given the generally low levels of volatility in recent years, and the uncertainty in the macroeconomic environment, it may be likely that after we get through this current spike, average volatility will creep higher. Therefore, investors and their advisors may want to consider strategic allocations to strategies that have historically held up in periods during which volatility increased and equity market returns were less robust. Should you find an unmet need, it is likely prudent to wait for the dust to settle before making any changes. Volatility spikes, by definition, are short-lived, but regret lasts quite a bit longer.

Learn more about funds managed by Invesco Quantitative Strategies:

Invesco All Cap Market Neutral Fund

Invesco Global Market Neutral Fund

Invesco Low Volatility Equity Yield Fund

Invesco Global Low Volatility Equity Yield Fund

Read more expert views on market volatility.

1 Source CBOE

Important information

Diversification does not guarantee profit or eliminate the risk of loss.

There is no assurance that the products listed here will achieve their investment objective. Mutual funds are subject to market risk, which is the possibility that the market values of securities owned by the funds will decline and that the value of the fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in these products. Please be aware that these funds may be subject to certain additional risks. See the prospectus for complete details about the risks associated with each mutual fund.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

Volatility measures the amount of fluctuation in the price of a security or portfolio over time.

Kenneth Masse, CFA

Client Portfolio Manager1

Ken Masse is a Client Portfolio Manager for Invesco Quantitative Strategies (IQS).

Mr. Masse entered the industry in 1992 and joined Invesco in 2008. Previously, he was an equity portfolio manager, head of Portfolio Construction & Implementation and a structured investments portfolio manager for PanAgora Asset Management.

Mr. Masse earned a bachelor’s degree in finance from Bentley University and a master’s degree in finance from Boston College. He holds the Series 6, 7 and 79 registrations and is a CFA charterholder.

1 Not involved in managing assets of any fund.

Making sense of market volatility

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On Aug. 21, the Dow Jones Industrial Average entered a correction — falling 10% from its most recent peak — and reminded investors what volatility looks like after almost four correction-free years.

While volatility exposes weaknesses in the market, in my opinion it also reveals the strength of high conviction managers who are skillfully navigating the market. Active management and smart beta strategies seek to surpass the “market averages” offered by traditional benchmarks — providing the potential not only for higher returns, but also for a smoother ride.

At Invesco, that’s what we seek to do for investors: Offer high conviction strategies that help people navigate volatility and achieve their financial goals.

Here, I’ve gathered opinions from several of our senior investment leaders across equities, fixed income and alternatives, discussing their view of market volatility and how it affects — or doesn’t affect — the opportunities they see.

Rob Waldner, Chief Strategist and Head of Multi-Sector, Invesco Fixed Income

China’s central bank cut key policy interest rates Aug. 24 to help calm markets after its recent currency devaluation set in motion a cascade of Chinese and global stock market turmoil. There may be some speculation that these changes to monetary policy may be the start of a form of quantitative easing (QE), however, we at Invesco Fixed Income do not view the People’s Bank of China’s (PBoC) latest moves as a broad monetary program along the lines of QE. While QE would be aimed at “getting ahead” of economic slowdown and deflation, we believe the Chinese authorities appear to be merely treading water, injecting sufficient liquidity to replace lost liquidity due to recent currency interventions. In other words, the authorities appear to be responding to recent market movements, but not more.

The unintended consequence of the foreign exchange regime shift in China to a dirty float from a peg is requiring the PBoC to sell US dollars on a very large scale. Most evidence points to large, steady capital outflows from China since the currency regime change that has forced the authorities to intervene in the foreign exchange market to prevent weakening of the currency. The mechanical reality of this policy is that China needs to raise US dollars via US Treasury sales in roughly the same magnitude as their currency intervention activity. We believe the PBoC has been selling US Treasuries to support this intervention, and that this has been one of the drivers of Treasury price action in recent days. US Treasuries over the course of the past few days have not rallied materially in the face of equity weakness and, in fact, have traded with a persistent higher yield bias.

We see no immediate end to the capital flows out of China and anticipate that the Chinese authorities will continue to intervene in the near term to support their currency. This should keep upward pressure on US Treasury yields in the near term.

We remain cautious on emerging markets, particularly Asian currencies and credits. The position-driven movements in global markets since the renminbi devaluation in August have created attractive opportunities in some markets where the fundamentals are positive but corrections have driven spreads higher. Invesco Fixed Income favors domestically focused US investment grade and high yield securities. Spreads are attractive and the fundamentals of the US economy remain solid, in our view.

Clas Olsson, Chief Investment Officer, Invesco International and Global Growth Equities

Explaining the market’s recent action is not central to our process, which is focused on identifying the most attractive companies from an earnings, quality and valuation perspective. That said, monetary and fiscal stimulus by Europe, Japan and China in the past three quarters seems to have fuelled expectations that growth would accelerate in the second half of 2015 and into 2016.

While Europe and Japan have seen some economic benefits from these policies, their better growth has been primarily driven by a weaker euro and yen. While the euro and yen have become more competitive, the yuan (due to its peg to the US dollar) has become less competitive. Despite efforts by the Chinese government to stimulate growth, their economy has continued to slow.

Future global growth expectations appear to be in a process of resetting, leading to higher volatility. We would not be surprised to see higher volatility sustained until the market digests lower global growth expectations.

As disconcerting as volatility may be, we believe it tends to create long-term opportunities for our shareholders. It’s rare to find a thriving business at a compelling valuation when everything is going right; those valuations typically occur when fear dominates the market. On a stock-by-stock basis, we see this recent decline as a buying opportunity. From a regional perspective, our process is finding more opportunities within Asia and Latin America as we have seen an indiscriminate sell off in emerging markets. From a sector perspective, we are finding more ideas within consumer staples, health care and some quality cyclicals such as technology and industrials.

We don’t try to predict macro environments, but as active managers who seek to consistently take advantage of volatility in the markets, we welcome the increased volatility as it is generally favorable for our quality growth style and as it expands our opportunity set.

Juliet Ellis, Chief Investment Officer of Invesco US Growth Equities

The current sell-off has been driven by both technicals and fundamentals — and it can become circular.

From a fundamental perspective, actions taken in China demonstrate that despite published economic data, officials in China are concerned about the risk of a hard landing. If currency devaluation spreads to other countries, the risk of default rises and sentiment moves to risk-off. From a technical perspective, the market is and has been “uneasy” with the uncertainty around the Federal Reserve’s strategy and pace for raising rates in the very near future, making it vulnerable to a sell-off. The US small and large-cap markets have been rising steadily since late 2014 with only minor pull-backs, so a correction seems reasonable.

My team thinks a buying opportunity is developing, but we’re reluctant to call a specific bottom. As this correction has pulled the markets to a flattish return, we could be setting up for a healthy fourth-quarter rally. In terms of industries, we think restaurants, software and health care equipment and services are attractive. We would not be buyers of biotech due to valuation concerns even after this pullback.

We continue to expect the US economic cycle to steadily progress into 2016 driven by improved housing, high consumer confidence and better employment. We do not think a US recession is likely.

Kevin Holt, Chief Investment Officer, Invesco US Value Equities

Often, market volatility can lead to value opportunities as company fundamentals and attractive valuations are typically ignored in a sell-off, and even quality companies fall with the rest of the market. Currently, we’re assessing company fundamentals and valuations on a stock-by-stock basis to see whether there are any attractive opportunities that fit our approach. Those assessments will vary based on the type of value strategy — there are many ways to be successful, and intellectual independence is a core value across our teams.

Invesco’s US Value complex includes four broad strategies. Each has a distinct approach to evaluating companies:

  • Our relative value strategies look for companies that are experiencing a positive catalyst and are inexpensive relative to the market, applicable sector and their own history.
  • Our deep value strategy is a contrarian approach that utilizes a long-term investment time horizon (typically, four to five years) to take advantage of significant discounts of the current stock market price and the underlying value of a company, using different valuation metrics depending upon the growth or cyclical nature of the business.
  • Our flagship dividend value strategy closely evaluates companies’ total return profile, emphasizing appreciation, income and preservation over a full market cycle.
  • Our intrinsic value strategies use a traditional intrinsic value approach in which the goal is to create wealth by maintaining a long-term investment horizon and investing in companies that are significantly undervalued on an absolute basis, using consistent valuation assumptions for all businesses.

The portfolio managers for these four distinct value approaches are staying true to their processes and capitalizing on value opportunities as they find them.

Ron Sloan, Chief Investment Officer of Invesco Global Core Equities

Global markets have become extremely volatile due to an old-fashioned growth scare in developed countries, as the opportunity to find organic earnings growth has become quite limited.  Companies that were benefitting from fast-growing emerging market economies (for example, commodity-related industries) have seen a meaningful decline in demand in the past few years, and the trend does not appear to be slowing.

For the market to continue its multi-year climb, I believe it will have to be driven by earnings growth, and not valuation or central bank maneuvers.  And, new leadership in the market will be required.  Earnings estimates are collapsing, and should be expected to continue to drop into 2016. “Where can you find earnings growth?” is the question my team focuses on every day, but particularly now.  While we are not expecting the US economy to enter a recession, meaningful earnings growth is likely to be limited to a few select segments of the market.

Groups that we find encouraging at this point include home builders (and their derivative beneficiaries), “old” tech companies (versus a few very high profile and arguably overpriced internet-related companies) and select consumer cyclicals (several retailers, for example).  While we are quite constructive on some high-quality financials, we believe that, at this stage of the market, it is too early to be aggressive for the broader sector. We are also cautious in some areas of recent strength such as autos, as we believe inventory build-up has likely created a headwind for near-term earnings.

A key differentiator for us is identifying companies that are investing in their business, and focusing on long-term growth as opposed to financial engineering (stock buybacks) for short-term results.  We believe we are entering a stage of the market that will demonstrate greater differentiation between companies, particularly in regards to quality of management — as well as differentiation among investment managers’ processes and how they approach the market.

Scott Wolle, Chief Investment Officer, Invesco Global Asset Allocation

Recent market volatility took many investors by surprise.  As risk-parity managers, my team aims to stay ready for the events that no one is expecting. August’s elevated volatility does not affect our investment approach.

Our balanced-risk approach seeks to mitigate the effects of negative surprises and take advantage of opportunities in an efficient and effective way. The aim is to provide investors with a smoother ride through the three phases of the economic cycle — inflationary growth, non-inflationary growth and recession. We strive to achieve this objective in three primary ways:

  1. Each asset class exposure — stocks, bonds and commodities1 — is built by considering the key drivers of return specific to that asset class.
  2. We combine these asset classes based on the amount of risk they may contribute to the portfolio. (Whereas other strategies, such as 60/40 portfolios, allocate a certain percent of capital to each asset class, regardless of their risk contribution.) We believe true diversification is key to limiting downside risk.
  3. Markets move in cycles, so we make tactical adjustments, seeking to take advantage of these cycles, allowing us to be more adaptive to the current environment.

When we build our balanced-risk portfolios, we think first about economic outcomes and which assets could best defend or take advantage of each. We next consider the liquidity, diversification benefit, and evidence of a risk premium for each asset. We believe this results in a portfolio that has the opportunity to prove resilient in challenging environments, ample liquidity, and diversification.

David Millar, Head of Invesco Multi Asset

The events of the past few days have underscored the unpredictability of financial markets and the importance of portfolio diversification. With an uncertain market outlook, which could include several catalysts for increased volatility, the Multi Asset team believes it’s important for investors to include sources of returns in their portfolios that could complement, but behave independently of, the traditional stocks and bonds they may already own.

The team believes the best way to achieve this type of diversification is to break away from the focus on asset class constraints that often distract from fundamental long-term thinking and focus on finding good investment ideas. The team has the flexibility to search globally for these ideas across a wide array of asset classes, geographies, sectors and currencies. This allows us to invest in things that may work, even when traditional markets may not. For example, investing in volatility as an asset class — by buying volatility instruments — could potentially increase the defensive exposure in the portfolio, even as traditional safe haven assets come under pressure.

We have an absolute return mandate that includes a target return of 5% above three-month US Treasuries over a rolling three-year period, with a target volatility of less than half that of global equities, over the same rolling thee-year period. We seek to achieve these targets by investing in a portfolio of ideas that the team believes work best together. At the same time, we also evaluate each idea in the context of possible but highly unlikely events (not unlike the one we just experienced). Why does this matter? Because as we just saw, in this type of environment, we believe it’s important not only to align a portfolio with what we think will work, but also to structure the portfolio for when we might be wrong.

Bernhard Langer, Chief Investment Officer, Invesco Quantitative Strategies

China’s attempts to shore up its domestic growth through currency devaluations and aggressive monetary stimulus have unnerved many investors around the globe. As a result of this and other macroeconomic events like the drop in oil prices and the uncertainty surrounding rate lift-off in the US, equity markets have sold off sharply and volatility has spiked. On August 17, the VIX was around 13; just one week later, however, it had jumped to nearly 412 – a level last seen in October 2011 during the eurozone sovereign debt crisis.

These extreme short-term gyrations can be quite stressful, but are an excellent time to reflect, not react. The investing horizon for most investors is measured in years (if not decades), not days. Therefore, it is most appropriate – and fiscally responsible – to consider the implications of risk over a time frame that extends beyond today’s headlines.

Within Invesco Quantitative Strategies, we have been managing risk as well as return for over 30 years. Throughout that time we have quite deliberately used models that forecast risk over a longer horizon in all our equity strategies. We believe this has led to more stable risk profiles in those strategies because long-term average volatility is simply easier to predict – and therefore manage – than short-term volatility.

Dan Draper, Managing Director of Global ETFs

Periods of market volatility offer investors the opportunity to reflect on their core investment strategies. It’s easy to feel comfortable in a bull market, but when market turbulence strikes, we all become better acquainted with our appetite for risk. Investors who rely on market-cap-weighted benchmark products go in with the understanding that, for better or worse, they will earn the returns of the market. That’s great when stocks are surging. But as the past week reminds us, market-cap-weighted strategies also expose investors to the full risks of the market.

Smart beta strategies are based on the premise that market prices are not perfectly efficient and that alternative weighting and factor exposure can exploit these inefficiencies. One of the advantages of smart beta strategies is that they offer so many diversified sources of return, and can deliver favorable risk-adjusted returns across many different market environments.

Right now, investors are focused on volatility. Our low volatility portfolios may help those who want to participate in the equity markets, while increasing the potential for downside protection. Even for the most risk-averse investor, maintaining some equity exposure – even during market corrections – can be important over the long-term to protect against inflation and potentially increase purchasing power.

Regardless of market conditions, smart beta exchange-traded funds (ETFs) may offer a versatile, transparent way to help meet investors’ objectives. Of course, not all low volatility products are alike and, depending on the provider, they can offer very different risk/return profiles. It’s important that investors consider ETF providers with a time-tested track record of performance in all market conditions.

Ingrid Baker, Portfolio Manager, Emerging Market Equities

The long-term transition of China from an investment-driven growth engine to a consumption-driven one remains intact, but challenges remain.  For one, consumption relies in part on a healthy investment environment to provide jobs in construction sectors, whether for residential/commercial properties or public works.  Secondly, demographic trends in China are worrisome as the working age population continues to decline, putting pressure on support ratios as the country pays back the “youth dividend” from the so-called “One-Child Policy” that coincided with China’s generation of significant growth.

That said, with anecdotal evidence from publicly listed manufacturing companies that higher wages are putting pressure on margins, against a backdrop of sustained low deflation, mass-market consumers are gaining purchasing power.  This, all else equal, should allow the expansion of the Chinese middle class to continue.  Urbanization in China lags well behind North Asian neighbors, providing a visible path for consumption growth over the long term.  In the more near term, the government also retains capacity to fight slower growth with monetary easing and some selective fiscal stimulus, particularly in urbanization-related infrastructure such as mass transit, water management and social housing.

My team is finding bottom-up opportunities in China, preferring companies that have exposure to a growing consumer class.  This includes selective internet stocks, as well as sectors such as health care, insurance, and rail construction that have meaningful secular growth prospects.  Some stocks in other Asian markets, such as Korea and Taiwan, also have attractive China operations that provide good exposure to the country and have management teams that have experienced slowdowns in their own markets and so should be able to navigate macroeconomic headwinds in China.  We are underweight banks as interest rate liberalization and declining asset quality seem likely to impair historically high returns on equity.

Walter Davis, Alternative Investments Strategist

The recent sharp sell-off in global equity markets has focused investors on the importance of holding diversifying investments that can help cushion their portfolios during times of market stress. Given their unique nature, alternative investments are proving to be useful tools to help investors weather the current market storm.

Alternatives have historically outperformed equities during periods of equity weakness, while equities have historically outperformed alternatives during periods of equity strength. This has proven to be the case as alternatives lagged equities during the post crisis bull market, while outperforming equities on a year to date basis in 2015.3

There are a wide variety of alternative investments, with some playing offense and helping build investor wealth, and others playing defense and helping investors preserve wealth. Here are three:

  • Market neutral funds. For investors looking to cushion their portfolio against increased market swings and mitigate downside risk, market neutral funds might be an appealing option. Such funds trade related equities on a long and short basis, such that the fund has close to zero net exposure to the market and a beta that is close to zero. The key to generating a positive return is security selection – determining which equities to go long and which to go short. Market neutral funds seek to generate positive returns across all market cycles and have historically generated modest returns with low volatility.
  • Long/short equity funds. These funds allow investors to participate in the equity markets on a hedged basis. Such funds combine both long and short equity positions in a portfolio, while typically being net long to equities. As a result, fund performance should track that of the overall equity market, but the fund would be expected to underperform during a rising equity market (due to losses on the fund’s short equity positions), and outperform during a falling equity market (due to gains on the fund’s short equity positions).
  • Global macro funds. Global macro funds invest across the global equities, fixed income, currencies and commodity markets on a long and short basis. Such funds invest opportunistically and have the ability to determine what markets they want, and don’t want, to participate in. Furthermore, because these funds have the ability to invest on both a long and short basis, they have the potential to achieve profits in both rising and falling market environments.

I think alternatives should be a core part of every investor’s portfolio because they can do things that traditional stocks and bonds can’t. If investors use the recent market volatility as an opportunity to explore the world of alternatives, I believe that will be a positive outcome of this uncertainty.

1 Under normal conditions, the strategy invests in derivatives and other financially-linked instruments whose performance is expected to correspond to U.S. and international fixed income, equity and commodity markets. However, the performance of the asset classes cannot be guaranteed. The derivative investments and enhanced investment techniques (such as leverage) used by the portfolio are subject to greater risks than those associated with investing directly in securities or more traditional instruments.

2 Source: CBOE

3 As of Aug. 24, 2015, every Morningstar Alternatives Fund Category is outperforming the S&P 500 Index on a year-to-date basis.

Important information

Volatility measures the amount of fluctuation in the price of a security or portfolio over time.

Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.

A dirty float is a floating exchange rate system in which a government or central bank occasionally intervenes to affect the value of its country’s currency in a managed fashion.

A currency peg refers to the policy of tying one currency’s value to another currency.

Deflation is a decrease in the general price level of goods and services that occurs when the inflation rate falls below 0%.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

Stocks are related if they are driven by the same fundamental factors; for example, two stocks from the same industry.

Long positions make money when an investment rises in price.

Short positions make money when an investment falls in price.

Beta is a measure of risk representing how a security is expected to respond to general market movements.

A hedge is an investment made to reduce the risk of adverse price movements in a security by taking an offsetting position in a related security.

Past performance is no guarantee of future results.

Diversification does not guarantee profit or eliminate the risk of loss.

Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Stock and other equity securities values fluctuate in response to activities specific to the company as well as general market, economic and political conditions.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Smart Beta represents an alternative and selection index based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both in active or passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.

There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The fund’s return may not match the return of the index.

Karen Dunn Kelley

Senior Managing Director

Karen Dunn Kelley is the Senior Managing Director of Investments. She is responsible for Invesco’s fixed income business, investment global strategies business, equity trading, and investments administrations. She is also co-chair of the Investor’s Forum, a member of Invesco’s Worldwide Institutional Strategy Committee, president and principal executive officer of Short-Term Investments Trust and AIM Treasurer’s Series Trust (Invesco Treasurer’s Series Trust), and serves on the boards for the Short-Term Investments Company (Global Series) plc, Invesco Global Management Company, Limited and Invesco Mortgage Capital Inc.

Ms. Dunn Kelley joined Invesco in 1989 as a money market portfolio manager. In 1992, she was named chief money market and government officer. In 1994, Ms. Dunn Kelley was responsible for creating the Short-Term Investments Co. (Global Series) plc portfolios. In April 2007, she was named CEO of Invesco’s newly combined fixed income and cash management teams.

Ms. Dunn Kelley has been in the investment business since 1982 and began her career at Drexel Burnham Lambert on the Fixed Income High Grade Retail Desk. In 1985, she was promoted to vice president and assistant manager. In 1986, Ms. Dunn Kelley joined Federated Investors (Pittsburgh) and became involved in the asset management business aspect of the fixed income division.

Ms. Dunn Kelley graduated magna cum laude with a BS from the Villanova University College of Commerce and Finance.

Invesco Advisers, Inc. is an investment advisor; it provides investment advisory services to individual and institutional clients and does not sell securities. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail mutual funds, institutional money market funds and is the sub-distributor for the STIC Global Funds and the Invesco Global Product Range. Shares of the STIC Global Funds may not be offered or sold directly in the US, its territories or possessions to US citizens or residents, as further described in the prospectus. Some of the investments offered by Invesco are not registered with the Securities and Exchange Commission and are offered to qualified investors via a private placement. All entities are wholly owned, indirect subsidiaries of Invesco Ltd.


‘Endowment empowerment’ for your portfolio

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Endowment funds are designed to be sustainable, multi-generational sources of money for charitable or nonprofit organizations — think universities and museums, for example. These entities establish foundations that are supported by donor contributions and are typically invested in very well-diversified portfolios across traditional and alternative asset classes. Although there are many types of endowments, they generally seek to provide ongoing financial benefits by earning interest on investments while preserving the principal. As in the wider world of investing, the endowment world turns on performance — outperformance can make heroes of investment committees and their financial advisors, while underperformance can mean unemployment.

What does this have to do with the rest of us and our portfolios? Actually, quite a bit.

Endowments for ‘the rest of us’

As millions of investors begin to draw money from their 401(k) balances during their retirement years, I believe they need to think the same way an endowment thinks — long term, sustainable, highly diversified. Forget that “die broke” idea; we are typically living longer, and no one wants to outlive their income.

Instead of putting 100% of their savings in cash or other low-risk — and potentially low-return — investments, investors who are planning to take a typical drawdown of 4% to 5% per year from their retirement savings for living needs should consider investing for growth, income and all types of market and economic environments, in my view. A tall order, to be sure, but it’s possible with the right asset allocation mix and account maintenance to increase your odds of success over long periods of time.

Maximizing the mix

What would a properly designed mix of investments look like? That depends on each individual, but there are several solid choices that — when combined — could help contribute to timeless investment principals such as asset diversification, risk reduction, lower correlation and diversified income sources:

  • Equities, including US, foreign, emerging markets and private equity
  • Fixed income, including corporate, government and foreign
  • Preferred or convertible securities
  • Alternative assets, such as real estate, commodities, infrastructure and master limited partnerships (MLPs).
  • Alternative strategies, such as market neutral funds, that can be used to diversify a portfolio.

Not only are investments choices important, but so is the investment mix. Endowment advisors typically recommend investment models that are relatively “flat,” or more equally weighted, across stocks, bonds and various types of alternative investments, as opposed to more sloping models that give one asset class considerably greater weight. The chart below shows one example of how an endowment allocation may work.

A ‘flat’ approach: Endowments generally stay well-diversified among stocks, bonds and alternatives

endowment allocation

Source: Fund Evaluation Group

On the other hand, many individuals start with a traditional 60% stock/40% bond allocation and gradually shift their emphasis toward bonds the closer they get to retirement. For these investors, the addition of alternative investments such as real assets and non-traditional strategies is a change that, in my view, is worth investigating. Alternative investments are designed to help people meet timeless investment goals by pursuing opportunities that traditional investments can’t.

Managing your portfolio like an endowment

An experienced financial advisor can design, implement and maintain an individualized investment plan that incorporates the same principles endowment funds follow. Managing your portfolio like an endowment can potentially help you enjoy a more comfortable, dependable lifestyle during your retirement years. Yes, we’ll go through some disconcerting markets, as we’ve recently witnessed, but your overall investment mix can potentially generate the type of income and gains necessary to sustain your lifestyle.

Investors with adequate exposure to equity and fixed income may want to consider additional diversification. Invesco Unit Trusts offers many choices to explore, including:

May you be endowed with sustained good fortune.

Important information

Correlation is the degree to which two investments have historically moved in relation to each other.

Private equity strategies invest in companies that are not publicly quoted on a stock exchange.

Market neutral strategies use offsetting long and short stock positions in an attempt to limit nonstock-specific risk.

Diversification/Asset allocation does not guarantee a profit or eliminate the risk of loss.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Preferred securities may include provisions that permit the issuer to defer or omit distributions for a certain period of time, and reporting the distribution for tax purposes may be required, even though the income may not have been received. Further, preferred securities may lose substantial value due to the omission or deferment of dividend payments.

Convertible securities may be affected by market interest rates, issuer default, the value of the underlying stock or the right of the issuer to buy back the convertible securities.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments.

There is no assurance the trust will achieve its investment objective. An investment in this unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. This trust is unmanaged and its portfolio is not intended to change during the trust’s life except in limited circumstances. Accordingly, you can lose money investing in this trust. The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.

Jack Tierney

Head of Product Development, Management and Investment Research

Invesco Unit Trusts

Mr. Tierney joined Invesco in 2010. Prior to joining the firm, he performed the same role for Van Kampen Unit Trusts since 2003. During his tenure with Van Kampen, he held positions within Van Kampen Consulting, business development, marketing services, mutual fund product management, and distribution, having started as a wholesaler with Van Kampen Merritt in 1984.

Prior to Van Kampen, Mr. Tierney spent four years with Merrill Lynch in Chicago as a financial advisor. He began his career as a high school business teacher and basketball coach in the Chicago suburbs. Mr. Tierney earned a Bachelor of Science degree in Marketing and a Master of Science degree in Business Education from Northern Illinois University.

Oil stocks are cheap, but for how long?

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I’ve been asked lately whether my view that oil will return to $75 per barrel has changed. It hasn’t, and the reason is quite simple: That’s the price needed for additional non-OPEC supply to come onto the market. At current prices in the $46 per barrel1 range, there is no economic incentive for additional output.

In the exploration and production space, virtually nobody is earning a return on their capital at current prices – not the super-majors, not the junior companies, and probably not even state-owned oil and gas producers. I’ve been investing in the energy sector for 20 years, and I have never seen oil stocks trading so cheaply.

Much of the pessimism surrounding the price of oil is based on strong flows from US shale producers, but I think speculators are missing the mark. The data we’re seeing in terms of individual well results is from companies that have access to the best equipment and the best people managing the rigs — and they’re drilling their best locations.

The current market represents a historic buying opportunity, in my opinion. And Invesco Energy Fund is buying companies that we think can potentially make a lot of money for shareholders in a two- to three-year time horizon.

For example, I’m a big fan of Devon Energy Corp. (4.68% of Invesco Energy Fund as of July 31, 2015), which I believe has been oversold.

Devon Energy is a large independent exploration and production company that has repositioned its portfolio to focus on high-returning, oil-growth properties, including the Eagle Ford and Permian Basins. Devon’s asset quality is high — its well results continue to improve and costs continue to come down. Well performance in the Eagle Ford and Permian is exceeding production expectations due to enhanced well completion designs.

In addition, due to increased recoveries, drilling and completion cost efficiencies, and base decline management, Devon impressively expects to keep its fiscal year 2016 production flat year over year — with high margin oil growth offsetting gas declines — with a 45% lower budget, even while assuming bearish futures prices.2

Financial liquidity is strong with total liquidity of $4.7 billion, including a $3 billion undrawn revolver.3 Management is focused on maintaining a strong balance sheet and has the flexibility to accelerate production growth when prices improve and corporate return on capital employed justifies increased activity.

Our investment in this company is another example of the Invesco Energy Fund discipline in action: Find quality companies that are oversold by the market and are run by an incredibly strong management team. Keeping a long-term perspective is key to finding value. We’re not investing for the next two or three weeks; we see a very compelling investment opportunity when we look out two to three years.

1 Source: Bloomberg L.P., as of Sept. 4, 2015

2 Source: Company reports

3 Sources: Company reports and Invesco analysis

Important information

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus.

Norman MacDonald, CFA

Portfolio Manager

Norman MacDonald is a portfolio manager for Invesco Energy Fund and Invesco Gold & Precious Metals Fund. Mr. MacDonald joined Invesco in 2008 as portfolio manager for Invesco’s Canadian distributed sector mutual funds.

Mr. MacDonald began his investment career in 1994 at State Street Bank and Trust as a derivatives analyst. He later moved to Ontario Teachers’ Pension Plan Board, where he worked for three years in progressive roles from research assistant to portfolio manager. His next role was as a vice president and partner at Beutel, Goodman & Co. Ltd. Prior to joining Invesco, Mr. McDonald was a vice president and portfolio manager at Salida Capital Corp.

He earned a BComm from the University of Windsor and is a CFA charterholder.

Alternative investing: Two ways to mitigate manager risk

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In part one of this blog, Alternative Investing: Why Manager Skill is Crucial to Results, I discussed why manager risk (e.g., the risk of selecting an underperforming manager) is a significant risk when investing in alternatives. Here, I discuss how investors can mitigate manager risk.

Mitigating manager risk involves two things:

  1. Conducting due diligence on the manager before investing. This helps increase an investor’s chances of selecting a successful manager.
  2. Diversifying across multiple managers. This step helps reduce manager risk by diversifying across multiple managers.

Conducting due diligence

When conducting due diligence, it’s important to focus on things such as the experience and pedigree of the manager, the investment process utilized, markets traded, assets under management, capacity of the manager’s strategy, and the infrastructure in place supporting the manager. As part of this process, it’s imperative to clearly identify the manager’s “edge,” namely, the unique aspect of the manager’s approach that will enable him or her to succeed.

A critical aspect of the due diligence process is developing an understanding of what to expect from the manager from a performance standpoint. To this end, an investor should only invest with a manager once they have an understanding of:

  • Expected return and risk.
  • Relationship of returns to traditional markets (e.g., correlation and beta).
  • The market environments that may be most/least favorable for the manager.
  • Expected performance in bull and bear market environments.
  • Expected performance in high/low volatility market environments.

Once the due diligence process is complete, an investor should have a thorough understanding of the manager and be in a position to decide whether or not to allocate to that manager. The due diligence process will also prove helpful when evaluating the manager’s future performance, as the manager can be evaluated against the performance expectations established as a result of the due diligence process.

Diversifying across multiple managers

While a robust due diligence process helps improve the odds of selecting a successful manager, it does not eliminate manager risk. To further mitigate manager risk, investors should diversify their alternatives allocation across multiple managers, ideally across managers that have complementary approaches and relatively low correlation to one another.

Investors can either build their alternatives portfolio piece by piece, or they can consider a multi-alternative fund-of-funds that invests in multiple funds run by multiple managers. In this case, the investor depends on the fund-of-fund manager’s expertise in asset allocation and manager selection.

Talk to your advisor

The two steps discussed above are essential for mitigating manager risk. That said, conducting manager due diligence and diversifying across managers is a tall order for most investors. For this reason, I believe investors would benefit considerably from working with a financial advisor who is knowledgeable and experienced in alternative investments. Such an advisor can help their clients navigate the challenges of investing in alternatives in general, and help mitigate manager risk, in particular.

Learn more about alternative investing at invesco.com/alternatives.

Read more blogs by Walter Davis.

Important information

Correlation is the degree to which to investments move in relation to each other.

Beta is a measure of risk representing how a security is expected to respond to general market movements.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Past performance cannot guarantee future results.

Diversification does not guarantee a profit or eliminate the risk of loss.

Walter Davis

Alternatives Investment Strategist

Invesco

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

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Rethinking ‘safe haven’ assets in a multi-asset portfolio

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Over the last 18 months, the Invesco Multi Asset team has maintained that the lack of volatility in several markets versus historical norms was providing interesting investment opportunities. At the start of the year, we published a blog reinforcing our belief that volatility was an undervalued asset class (Investing in Volatility: Is Asian Volatility Poised to Rise?) and specifically addressed Asian equity market volatility and how the region’s fundamentals appeared to be pointing toward a storm on the horizon. In the last several weeks, that storm has blown in — we have not only seen a resurgence of volatility in many equity markets, but we have also, once again, seen signs that yesterday’s playbook with respect to portfolio diversification may not apply in the current market regime.

‘Safe haven’ assets are acting more like equities …

Markets began their tumultuous journey downward toward the end of June, driven by déjà vu worthy headlines around Greek debt and exacerbated by familiar fears over a Chinese slowdown and hard landing. During this period Asian equity markets were particularly hard hit, with the Hang Seng China Enterprises Index (HSCEI) falling 38.5% from its peak in May, for example.

To offset the impact from falling equity markets, investors often look toward “safe haven” assets such as government bonds and exposure to the US dollar, and may also shift their preference to defensive stocks versus cyclicals, and to US markets versus their riskier counterparts. However, most recently we have seen correlations rise between equities and the traditional perceived “safe haven” assets of government bonds and the US dollar, indicating their ability to diversify portfolios during periods of equity market stress is being challenged.

… but volatility may help provide diversification

Historically, volatility has been a strong positive performer in the face of significantly falling equity markets. For this reason, we believe that volatility can be an effective tool for multi-asset portfolios, especially in a market environment where conventional asset allocation wisdom with regards to “safe haven” assets is being challenged.

Recently, we saw Chinese equity volatility, measured using an HSCEI three-month volatility instrument, spike from a relatively benign level in the mid-20s, where it had rested for most of the year, to above 52 at the start of September. This movement was exacerbated by large market players, such as investment banks, quickly becoming buyers of volatility instruments. Those who capitalized on the strong move in Chinese equity volatility were able to help offset the drawdown felt by exposure to Chinese or related equity markets during the sell-off.

Taking a view on volatility

A central tenet of the Invesco Multi Asset investment philosophy is that true diversification comes from an unconstrained approach to asset allocation. This enables us to take a view on the volatility of different markets, and express that view through instruments that allow us to isolate volatility as a distinct asset type. We believe this is invaluable in terms of diversification.

How do we do this? We look for areas where we think that the relative risk implied by markets presents an opportunity. This can be expressed through paired investments in a single asset class—for example, we can express ideas that by design could benefit from an outperformance of Asian equity risk versus US equity risk, and, similarly, by an outperformance of the risk of the Australian dollar versus that of the US dollar. Or, we can look across asset classes. For example, we have ideas designed to capitalize on the relative volatility of UK equities and UK bonds. As with any idea in our portfolio, these volatility ideas are supported by specific macroeconomic themes and fundamentals – the first two ideas referenced above are tied to the China slowdown; the cross-asset UK idea is backed by the potential distortion created by Central Bank monetary policy.

Additionally, we can exploit the diversification qualities of volatility by embedding exposures within an equity-based investment idea. By adding long exposure to the volatility of various equity markets alongside allocations to equities, we believe we can at least partially offset the portfolio’s exposure to a significant equity market drawdown, without meaningfully jeopardizing our ability to capture the upside of a positively trending equity market environment.

It is important to note a few things about investing in volatility instruments:

  • While volatility may provide an additional diversification resource to investors, it is by no means a panacea — investors shouldn’t expect volatility instruments to completely replace other diversifying assets. Rather, they may be viewed as a complement due to their distinct qualities in a significant market selloff.
  • Additionally, volatility opportunities must be thoroughly evaluated, especially in markets where indiscriminate volatility sellers seeking income may overwhelm normal market dynamics.
  • Lastly, sometimes the best way to get attractive exposures to volatility may come from more sophisticated derivative markets that are not accessible directly by all market participants. Therefore, it is important to choose a manager with experience evaluating and trading in these markets.

We encourage investors to talk to their advisors about multi-asset strategies, and to do their homework into the experience of their fund managers. For Invesco Global Targeted Returns Fund, you can start here.

Important information

The Hang Seng Index is an unmanaged index considered representative of the Hong Kong stock market and includes the largest companies traded on the Hong Kong Exchange.

The Hang Seng China Enterprise Index in an unmanaged index tracking the performance of mainland China companies listed on the Hong Kong Exchange (known as H-shares). An investment cannot be made into an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

Past performance is no guarantee of future results.

Correlation is the degree to which two investments have historically moved in relation to each other.

Volatility measures the amount of fluctuation in the price of a security or portfolio over time.

A hard landing is when an economy sharply slows down after a period of quick growth. This can be the inadvertent result of government or central bank attempts to keep inflation in check.

The fund seeks diversification through exposure to different asset types, but has non-diversified SEC classification.

Please note there is no guarantee this performance target or volatility target will be achieved.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

There is a risk that the Federal Reserve Board (FRB) and central banks may raise the federal funds and equivalent foreign rates. This risk is heightened due to the potential “tapering” of the FRB’s quantitative easing program and other similar foreign central bank actions, which may expose fixed income investments to heightened volatility and reduced liquidity, particularly those with longer maturities. As a result, the value of the fund’s investments and share price may decline. Changes in central bank policies could also increase shareholder redemptions, which may increase portfolio turnover and fund transaction costs.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. These risks are greater for the fund than most other funds because its investment strategy is implemented primarily through derivatives rather than direct investments in more traditional securities.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The fund is subject to the risks of the underlying funds. Market fluctuations may change the target weightings in the underlying funds and certain factors may cause the fund to withdraw its investments therein at a disadvantageous time.

Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility.

The fund is non-diversified and may experience greater volatility than a more diversified investment.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

The fund may invest in derivatives either directly or, in certain instances, indirectly through Invesco Cayman Commodity Fund VII Ltd., a wholly owned subsidiary of the fund organized under the laws of the Cayman Islands (Subsidiary). Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in US registered investment companies.

Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time.

The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.

Danielle Singer, CFA

Senior Client Portfolio Manager1

Danielle Singer is a Senior Client Portfolio Manager for the Invesco Multi Asset team.

Before joining Invesco in 2014, Ms. Singer was a strategist and director of the Global Investment Solutions (GIS) team at UBS. Her responsibilities included participating in the review and setting of multi-asset and currency strategies, interacting with the investment team to coordinate investment strategy, and assisting clients as part of the GIS initiative. Previously, Ms. Singer was an account manager for UBS’s Institutional Investment Management group, where she maintained client portfolios and presented investment reviews. Prior to joining UBS in 2004, Ms. Singer worked on the auction rate securities desk at Deutsche Bank.

Ms. Singer earned a BA degree at Middlebury College and an MBA at the University of Chicago with concentrations in analytic finance and econometrics. She holds the Series 3, 7 and 66 registrations. Ms. Singer is a CFA charterholder and a member of the New York Society of Security Analysts.

1Not involved in managing assets of any fund.

The post Rethinking ‘safe haven’ assets in a multi-asset portfolio appeared first on Expert Investment Views - Invesco US Blog.

Three keys for advisors when implementing alternatives

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For the better part of 25 years, I have worked closely with financial advisors regarding the use of alternative investments. I’ve found that the advisors who have the greatest success — i.e., satisfied clients who understand their investments and their results — utilize a thorough, thoughtful and regimented approach toward alternatives. Specifically, I see them do these three things:

  • They clearly define each client’s investment objectives and research whether alternatives can help meet those objectives.
  • If the answer is “yes,” they select alternatives they believe to be well suited to help meet those objectives.
  • Once they decide to use alternatives, they make them a consistent part of the asset allocation process for that client.

I believe this is the right approach for several reasons:

  • The advisor has a well-defined rationale for using alternatives that links their use to specific investment objectives.
  • The advisor gains a realistic understanding of what to expect from the different types of alternatives, especially with regard to performance. Given the unique nature of alternatives, it’s critical for advisors to understand what drives performance, and what to expect during different parts of the market cycle.
  • Once the decision is made to add alternatives, the advisor makes alternatives a core part of their long-term investment process for that client. As a result, the advisor avoids performance chasing. One of the biggest benefits of this approach is that it ensures that alternatives are included in the portfolio in anticipation of different parts of the market cycle, where they may be able to provide a diversified return stream when stocks and bonds may be under pressure.
  • Importantly, this process allows the advisor to have effective conversations with their clients in which they explain why they are using alternatives and how the use of alternatives can help meet the client’s investment objectives. The advisor can also set realistic expectations about what the client should expect from the alternatives selected.

The other side of the coin: The ‘dabbling’ approach

Just as advisors who successfully use alternatives share similar characteristics, I have found that advisors who struggle with alternatives tend to have similarities as well. Specifically, these advisors often lack a regimented approach and fall into the trap of dabbling. By “dabbling” I mean they often add alternatives based largely on recent performance and/or add alternatives in a random fashion that fails to link the use of alternatives to meeting specific investment objectives.

The dabbling approach often yields disappointing results for a few key reasons:

  • By not developing a well-defined rationale for using alternatives, the advisor tends to fall into the trap of allocating based on recent performance, which can pose the considerable risk of investing at unattractive levels where downside risk is greater than upside potential. This risk is especially pronounced for alternatives that have cyclical performance, such as managed futures, in which periods of strong performance are often followed by periods of decline. Furthermore, when investing based on a backward-looking view, the advisor runs the risk of “fighting a previous war” rather than preparing for future challenges.
  • Having failed to thoroughly research and understand the unique nature of the alternatives in which they are investing, advisors often fall into the trap of evaluating the investment based on short-term performance — perhaps even quarter by quarter. By doing so, the advisor ignores the various benefits that different kinds of alternatives may deliver over the longer term. Various alternatives may provide returns that are unique relative to traditional stocks and bonds, outperform during different parts of the market cycle, reduce portfolio volatility or provide important diversification.
  • From the client’s standpoint, the advisor does not provide a rationale that links the use of alternatives to the client’s investment objectives and does not provide the client with realistic expectations of how the various alternatives are expected to perform. As result, the client’s satisfaction with the alternative becomes based on short-term performance, often the relative performance vis-à-vis equities.

Clearly there is no one approach that guarantees success when implementing alternatives in investor portfolios. That said, in my view, the odds of success (satisfied clients who understand their investments and their results) increase dramatically when a thorough, thoughtful and regimented approach is taken, while the odds of success decline significantly when a dabbling approach is taken.

For more information about alternatives

Important information

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Asset allocation/diversification does not guarantee a profit or eliminate the risk of loss.

Walter Davis

Alternatives Investment Strategist

As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.

Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.

Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.

The post Three keys for advisors when implementing alternatives appeared first on Expert Investment Views - Invesco US Blog.

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