The valuations of a number of the ASX's biggest shares are starting to look a little bit stretched and this might have some investors feeling a little nervous.
For example, Commonwealth Bank of Australia (ASX: CBA) shares are now trading on a price-to-earnings ratio of more than 15 and offering a dividend yield of less than 4.9% – not particularly attractive considering the bank is unlikely to deliver anything more than low-to-mid-single digit earnings growth over the next couple of years.
As a result, I think investors should be prepared for some volatility later this year as the market looks to take profits and wait for more attractive opportunities.
With that in mind, here are three shares that I think could help to protect investors from a sharp sell-off:
Blue Sky Alternative Investments Ltd (ASX: BLA)
As the name suggests, Blue Sky Alternative Investments is a company that invests in alternative asset classes including private equity, private real estate, real assets and hedge funds. The important thing to note here is that the returns of alternative asset classes are not closely correlated with equity markets and this can provide share market investors with an additional level of diversification and risk management. Blue Sky is forecasting a huge jump in assets under management over the next three years as investors become increasingly aware of the benefits of investing in alternative asset classes.
Future Generation Investment Company Ltd (ASX: FGX)
Future Generation is essentially a 'fund of funds' that provides investors with exposure to some of Australia's best fund managers including Paradice Investments, Regal Funds Management and Bennelong Australian Equities Partners. Importantly, the managers use a diverse range of strategies and styles that are expected to reduce the level of volatility within the portfolio. For example, some managers employ a market neutral strategy, while others may use a long only or absolute bias strategy. So far, the shares of Future Generation have been far less volatile than the broader market over the past two years, although investors can expect the shares to underperform when the market is rallying strongly.
BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ)
Most retail investors lack the ability to short sell individual shares, but investors now have the ability to take a short position against the broader market by using this exchange traded fund (ETF). This can be a very useful hedging tool if you think the market is overvalued and you want to protect the value of your portfolio without having to sell your shares. It is important to note that a 1% fall in the Australian share market on a given day can generally be expected to deliver a 2% to 2.75% increase in the value of the Strong Bear Hedge Fund and vice versa. For a little less risk, investors can also consider BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR) which will only move a comparable, but opposite amount to the market on a given day.
