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Alternatives to rescue portfolio construction

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A global funds management house expects alternative investments to provide greater support for traditional asset classes in the coming 10 to 15 years.

A global fund manager has predicted alternative investments will play a bigger and more conventional role in investment portfolios to complement and support underperforming traditional asset classes over the next 10 to 15 years.

“We see alternative assets becoming something [that has been] generally part of the supporting cast to being on the stage and one of the main characters of portfolios as we move forward here in terms of thinking about portfolio construction,” JP Morgan global market strategist Kerry Craig said.

“And the real takeaway is … [that alternatives] are going to come to the aid of many portfolios. They offer that [above market return], they offer that income and they offer that diversification which investors are struggling to get from traditional asset classes.”

According to Craig, this shift in how alternative investments will be used in investment portfolios stems from a change in the perception and attitudes toward them.

“[Opinions of] alternative assets have shifted in terms of being something that’s just been a label [as to] what they are – private equity, hedge funds, real assets – to something that has become a little bit more outcome orientated when people were looking for income,” he noted.

“[This has shifted] again into, in terms of portfolio construction at least, looking at assets in the alternatives space more in line with the characteristics they share with many of those traditional asset classes.

“So things that are equity like, things that are fixed income like, or assets that bridge the two and are a bit more hybrid like.”

With regard to future returns, JP Morgan modelling used to formulate its Long-term Capital Market Assumptions for 2021 forecasts investment sectors such as private equity will deliver 2 per cent plus premium returns when compared to public equity.

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