A growing investment crisis prevails in the financial markets. New approaches are needed to manage risk and return. We are responding by adding «low-correlated assets» to our portfolio.
What are low-correlated assets?
Correlation means «interdependence». It describes the statistical relationship between two assets. It ranges between -1 (a perfect negative correlation) and +1 (a perfect positive correlation). The lower the correlation, the less the two assets move in the same direction.
Advantages in a portfolio
For investors, negative correlation is a desirable property. Adding low-correlated assets to a portfolio makes it more efficient and robust.
The correlation between many assets, however, is not stable. In positive market conditions, various asset classes have a correlation of about +0.6. When the market becomes very turbulent such as during the financial crisis in 2008) that correlation increases to almost +1 (see graph). The hoped-for protection for the portfolio fails – just at the most unfavourable time.
True low-correlation assets
Assets that contribute to the preservation of capital even in times of crisis have genuinely low correlation. Their returns depend on factors completely unrelated to stock market events. Investment funds that invest in operational wind farms are one example. Returns depend on how strong and for how long the wind blows: nature is the performance driver. However, it takes a lot of experience to separate the wheat from the chaff. Which wind power technology is being used? Is financing secured long term? Are electricity revenues and purchase contracts
fixed? Are outages adequately insured? A solid strategy eliminates undesirable disruptive factors and isolates the sought-after low-correlated return.
We differentiate between two types of low-correlated assets. Those, on the one hand, that invest in the equity of real assets. They exhibit higher risk and are suitable primarily as a substitut for listed equities. We invest roughly in the following strategies:
• Acquisition and operation of operational wind power installations: wind as a return driver. Target return of 4% p.a.
• Licensing and operation of operational water infrastructure: water quantity (hydro power, water treatment and purification) determine
the return. Target return of 7% p.a.
• Acquisition and operation of operational agricultural farming businesses and forest stocks: biological growth (livestock, agricultural produce, wood) drives the return. Target return of 8% p.a.
And those, on the other hand, that provide debt funding and which are
particularly suitable as a substitute for bonds. Examples of this kind of investment include:
• Debt financing of c ommodityproducing companies («contract
farming«): Medium-term, purposetied loans to medium-sized operating
companies, typically with collateral. Target return of 8% p.a.
• Trade financing of raw and semifinished products: Short-term loans
(60 to 90 days) for shipping commodities. Loans are fully collateralised,
transaction-based and selfliquidating. Target return of 5% p.a.
• Financing through the purchase of trade receivables («factoring«):
Short-term credit financing (40 days) through the purchase of open invoices at a discount. Target return of 5% p.a.