The Projected Growth Of Alternative Assets
When it comes to investing, the focus is typically on stocks and bonds. However, in recent years, many investors have turned their attention to another opportunity: alternative assets.
In fact, global assets under management in alternatives are projected to grow by 62% from 2020-2025. In this Markets in a Minute from New York Life Investments, we explain what alternative assets are and which categories will see the most growth.
Why Portfolio Asset Allocation Matters
Some financial professionals believe that asset allocation is more important than the specific assets that you invest in. This is because your asset mix is an overarching strategy that affects more than a single asset.
Your asset allocation will smooth out the volatility of the stock market and can help to ensure that your money is there for you when you need it. The last thing anyone wants is for the value of their investments to drop just before they need to withdraw from it.
It is one part of a diversified portfolio, and if done right, your asset allocation will give you peace of mind and help you sleep at night.
And finally, if you align your asset allocation to your goals, it can help you achieve them sooner.
Appendix 1 Statistical Information
- NOTE: In view of brevity only excerpts from the interviews are presented here.
- Interviewee: Mr. John Morris Senior Portfolio Manager at Peterson Hedge Funds
Question: What do you think is the origin of the subprime crisis?
Answer: In my opinion, six different aspects could have contributed to the crisis. They are lower interest rates both short and long-term, unwarranted confidence about the continued rise and the low volatility of US housing prices, a shift in the mortgage lending towards less creditworthy marginal borrowers, problems relating to incentives in the securitization model, poor performance of the credit rating agencies, and weaker financial regulations.
Question: What was the actual happening in the crisis?
Answer: The credit crisis started off in the summer of 2007 and it was originally thought it could be contained at a moderate level and with the minimum casualty. Rough estimates were made in July 2007 at a global figure of $ 50 to $ 100 billion. On more realistic estimates the figure is revised to $ 300 to $ 400 billion. This is just subprime losses alone. When the losses relating to other credit segments like auto, credit cards, student loans and corporate loans and the like are added the figure may well go up to $ 600 billion. Adding the losses of insurance companies, hedge funds and other financial institutions the losses may touch a figure of close to $ 1 trillion as estimated by IMF.
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Why Asset Allocation Is Important
There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, the selection of individual securities is secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Strategic Asset Allocation to Rebalance Portfolios
Investors may use different asset allocations for different objectives. Someone who is saving for a new car in the next year, for example, might invest their car savings fund in a very conservative mix of cash, certificates of deposit , and short-term bonds. An individual who is saving for retirement that may be decades away typically invests the majority of their individual retirement account in stocks, since they have a lot of time to ride out the market’s short-term fluctuations. Risk tolerance plays a key factor as well. Someone who is uncomfortable investing in stocks may put their money in a more conservative allocation despite a long-term investment horizon.
The Value Of Rare Whisky Classic Cars Wine And Handbags Are Up Over 100% Over The Past 10 Years
Luxury goods and other collectibles, despite their flashiness, don’t make up notable slices of the alternative assets portfolios of the wealthy. However, the value of luxury goods has grown by 129% over the past 10 years, as measured by the Knight Frank Luxury Investment Index.
Rare whisky has seen explosive growth in value over that period with a 478% increase. Handbags, wine, and classic cars have also notched increases in value of over 100% over the past ten years.
COVID-19 has thrown a wrench in luxury goods investing. Values of art, rare whisky, diamonds, jewelry, and coins dropped in 2020 as supply chain issues crunched production and delivery and normal methods of sales like auctions and other face-to-face interactions were snarled by the pandemic.
Clearly, some luxury goods have grown significantly in value and can offer many of the same benefits of other alternative investments. So why do they hardly register in the alternative investment portfolios of the wealthy?
There are a few reasons:
- Luxury goods are illiquid. They can be expensive and time-consuming to buy and sell even in small quantities.
- They’re risky and relatively unregulated — counterfeit art, for example, is a long-standing problem and sales are not always reported.
- Historical data for particular items can be lacking.
- Some luxury goods can require significant costs over time for things like maintenance and upkeep.
Data source: Knight Frank . Furniture data is from Q2 2020.
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Growth Vs Safer Investments
In summary, asset allocation is growth investments over safer investments.
We have seen that real estate can be a stock-alternative or a bond-alternative. So you need to figure out where it goes in your asset allocation equation.
Insurance products, on the other hand, generally are bond-alternatives. There are, of course, exceptions to this rule that we are not going to get into.
We can use any alternative investment and decide if it is stock-like or bond-like and put in it a unified asset allocation. This describes, in general, what percentage of our investible assets are risk assets and which of them are safer assets.
Lets talk a little more about Equity-Alternatives in Retirement.
Bonds And More As The Safer Number
At the bottom of the asset allocation equation, you have safer money made up of fixed-income assets and bond-alternatives.
Cash is also included and is not infrequently part of a barbell strategy where you have a lot of risk and a lot of cash and not much in between. Cash-alternatives and cash are usually just subsumed into the bond or safer number.
But most frequently, you have one or two bond funds that make up the bulk of your safer money, and then you might have alternatives to bonds.
I have a blog on bond-alternatives that should be of interest to you. This is a big topic and includes many of the alternative assets. These specific alternative assets should be considered bond-alternatives.
Again, the idea is less risk, and return of the principle is more important than growth.
So, add up your cash, cash-alternatives, bond-alternatives , and your bonds and then express that as a percentage of your overall investible wealth. Thats the bottom number!
With the Safer number out of the way, lets get to the main topic of this blog: the idea of equity-alternatives.
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What Is Asset Allocation And How Can It Impact Your Investment Portfolio
Your asset allocation can have a significant impact on your investment portfolio. But what is asset allocation? And how can you best take advantage of it within your portfolio? Read on to find out everything you need to know to get the most out of your asset allocation to accelerate the achievement of your financial goals.
How To Choose The Right Approach For You
In deciding the best approach to asset allocation for your situation, there are a number of factors to take into consideration. These include:
- Do you have the time and the investment experience to devote to an active or semi-active approach to asset allocation? If not, perhaps using a strategic approach is best for you.
- Your age and risk tolerance should come into play.
How you implement your asset allocation approach is important as well. Individual stocks and bonds can be solid investment choices, but this also takes extra work to stay on top of these holdings including understanding any company specific issues related to individual stocks.
Using mutual funds and ETFs can be helpful in implementing all or part of an asset allocation plan. This is especially true with regard to index mutual funds and ETFs. Index funds generally follow a market benchmark unique to a specific asset class and you wonât have to worry about style drift in the fundâs investment style and you might have to with an actively managed fund.
Overall your approach to investing and asset allocation should tie into your overall financial plan and should largely depend upon your stage of life. It can be beneficial to work with a qualified financial advisor to help you implement and manage an asset allocation approach that best fits your situation.
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Private Markets: 4 Steps To Help You Optimize Your Allocation To Alternatives
Individual investors often first get involved in alternative investments through ad hoc, one-off opportunitiesor by searching in specific asset class silos
Even the savviest family offices and pensions often start investing in alternatives on a fairly limited basis: by focusing on a single objective be it enhanced returns or yield, volatility mitigation or inflation protection.
But alternative asset classes and strategies have historically proven their worth. We believe traditional markets alone may be unlikely to provide the return, income and diversification that many investors seek. And the universe of alternatives has expanded offerings so that it now provides investors a robust toolkit.
Clearly, if youre going to invest in alternatives, its time to build a thoughtful strategy around your allocation. The challenge, of course, is how to accomplish this feat.1
Here, we provide a quick look at our four-step approach to constructing an alternatives portfolio plus some insights from our experienced specialists to help light the wayso that your investments might more effectively help you reach your goals.
1. Identify your investment portfolio objectives.
To us, building an alternatives portfolio starts with defining the outcome you seek so you can properly identify what approach might help you succeed.
So what do you hope to accomplish? There are generally two main categories investors look to solve for: diversification and return enhancement.
4. Pick the right partner.
Most Attractive Sectors In Private Markets
‘The hunt for yield leads to alternatives’ was seen as one of the key themes that would shape strategies among institutional teams looking to position their portfolios to manage any unknowns ahead in 2022, according to a report published by Natixis Investment Managers.
The 2022 Institutional Outlook, which features the results of a survey conducted among 500 institutional investors, reveals that information tech, healthcare, infrastructure, energy, real estate and financials were seen as the most attractive sectors for private markets ahead of 2022.
The report also states that inflation was ranked as the top concern, with the majority believing that it is transitory. Other top risks include interest rates, valuation, volatility and environmental, social, and governance issues.
Indeed, ESG has been a key topic among the institutional investor community, with all types of investors looking to embrace it. However, it is important that investors avoid approaching ESG as an opportunistic short-term commitment and instead see it as a long-term strategy.
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What Are Alternative Investments
Alternative investments are any investment besides stocks, bonds, and cash. Alternatives are relatively illiquidmeaning they cant be easily converted into cashand unregulated by the United States Securities and Exchange Commission .
Some of the most common types of alternative investments include:
- Hedge funds, which pool the capital of many investors and invest it across various securities with the intention of managing risk to outperform the markets rate of return.
- Private equity, which is the investment of capital in private companies and encompasses venture capital, growth equity, and buyouts.
- Real estate, which is the investment of capital in residential, commercial, or retail properties, either individually or through a real estate venture fund or investment trust.
- Debt investing, in which capital is invested in the debt of a private company and can be distressedor private.
- Commodities, in which capital is invested in natural resources, such as oil, agricultural products, or timber.
- Collectibles, in which items such as rare wines, cars, and baseball cards are purchased with the intention of selling them when their value appreciates.
- Structured products, which involve fixed-income markets and derivatives.
Risks To Alternative Investments
One major drawback to alternative investments is liquidity risk, since once invested, there is a contractual period during which the capital contributed cannot be returned.
For instance, an investors capital could be tied up and be unable to be withdrawn for long duration of time as part of an alternative investment.
Since most alternative investments are actively managed vehicles, there also tend to be higher management fees plus performance incentives .
Given the higher risk of losing capital, certain strategies like hedge funds are only available to investors that meet certain criteria .
The final risk to consider is that certain alternative investments have fewer regulations and oversight from the U.S. Securities and Exchange Commission , and the reduced transparency can create more room for fraudulent activities such as insider trading.
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Achieving Asset Allocation Through Life
Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to provide investors with portfolio structures that address an investor’s age, risk appetite, and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.
The Vanguard Target Retirement 2030 Fund would be an example of a target-date fund. These funds gradually reduce the risk in their portfolios as they near the target date, cutting riskier stocks and adding safer bonds in order to preserve the nest egg. The Vanguard 2030 fund, set up for people expecting to retire between 2028 and 2032, had a 65% stock/35% bond allocation as of Jan. 31, 2022. As 2030 approaches, the fund will gradually shift to a more conservative mix, reflecting the individual’s need for more capital preservation and less risk.
How Alternative Investing Can Improve Your Portfolio
Traditional investment vehicles such as equities, mutual funds, term deposits and fixed-income securities can only get you so far. To truly diversify your investment portfolio, you need to seek out other classes of assets collectively named alternative investments.
Savvy investors would do well to not put all of their eggs, so to speak, in a single basket. If your portfolio is too heavily skewed toward stocks and bonds, for instance, then you can suffer considerable losses during market downturns or periods of economic recession.
At my alternative assets firm, were often asked, What are alternative investments? Quite simply, alternative investments are investments in any assets that are not public stocks or bonds or based on a strategy primarily utilizing either.
In a 2018 report, Preqin valued the alternative asset market at almost $9 trillion globally, making it one of the largest financial markets by overall volume. Alternative investments are characterized by a variety of qualities, including the following:
Minimal correlation to market performance.
Primarily concerned with inefficient markets.
Active shareholder investing.
Other Alternative Assets
There are many examples of alternative assets that can be bought or sold in public and private markets. In my experience, the most common alternative asset types include:
Liquid alternatives .
Strategy For Alternative Investments
Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.
Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfoliostypically less than 10%to alternative investments such as hedge funds.
The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded fundsalso called alt funds or liquid altsare now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940.
Tangible Vs Intangible Alternative Assets
Tangible alternative assets include real estate, natural resources, commodities, collectibles, and precious metals.
Intangible alternative assets include Hedge Funds, Private Equity, Venture Capital, Cryptoassets, Derivatives, and Structured Products.
We can do better. Tangible assets can be growth or safer assets. Intangible assets can be either as well. How does the fact you can touch something make a difference? The real difference is that it either takes the pace of a stock or a bond in your portfolio. I dont think that alternative investments are tangible or notthey are equity- or bond-alternatives.
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