A global fund manager has confirmed the value of including an allocation to non-listed alternative assets in a portfolio despite the fact the returns generated by these investments have fallen in recent times.
“[Alternatives] still do offer substantial reasons to be in a portfolio. From a diversification perspective they are positively correlated with inflation and inflation shocks, unlike public assets, and there are a lot of alpha opportunities,” JP Morgan Asset Management managing director multi-asset solutions portfolio manager Leon Goldfeld noted.
“We are talking about real alternatives like real estate, infrastructure, transportation, timber and financial alternatives like private equity and hedge funds,” he said.
However, he did recognise the return characteristics these assets have delivered in the past few years have changed significantly for several reasons.
“What happened [in 2022] is that the premium [associated with] alternative [asset] returns, particularly with private equity over public equity or the premium of private credit over high yield, has shrunk,” he said.
“The reason it has shrunk is that for public assets [such as] equities and bonds we’ve had a reset but for private assets that reset hasn’t come through fully as yet because there is a smoothing process for capitalisation rates that haven’t fully marked to market [due to] an averaging [mechanism].
“And so because the privates have not really reset much, and that reset is still coming, but the public [assets] have the opportunity of having higher returns in private over public, at least from [a 2022] starting point, has shrunk.
Despite these market developments Goldfeld reiterated the manager’s conviction to have non-public alternative assets included as part of an investment portfolio.
“There are reasons to keep alternatives so we are, in our portfolio settings, not really shifting the alternative albeit the returns have altered,” he concluded.
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