July 18, 2023Navigating the Changing Investment Landscape with Alternative Assets

The investment landscape is evolving rapidly, and savvy investors are recognizing the need to adapt their strategies to navigate these changes. Traditional portfolios, such as the widely accepted 60/40 portfolio of public equities and bonds, are facing challenges due to shifts in the marketplace. Today we will provide valuable insights for investors looking to redesign their investment portfolios by incorporating alternative assets. We will explore the benefits of adding alternative investments, the challenges of accessing these assets, and recommendations for building modern, well-rounded portfolios.

The Evolution of the 60/40 Portfolio

For several decades, the 60/40 portfolio has been considered a gold standard for achieving long-term wealth. This portfolio allocation combines 60% public equities and 40% fixed income to deliver attractive risk-adjusted returns with lower volatility. However, major marketplace shifts are posing challenges to this traditional asset allocation paradigm.
One significant factor contributing to the changing investment landscape is the explosive growth of private market capital. Increasingly, companies are turning to private markets to raise capital for their growth and expansion. In fact, private markets have raised more capital than public markets annually for over a decade between 2009 and 2019. This trend highlights the growing importance of private markets in fostering innovation, value creation, and economic growth across industries.

The Rise of Alternative Assets Amid Bond Volatility

One of the key drivers of the increased interest in alternative assets is the volatility in the bond market, which has put the 60/40 portfolio under pressure. Historically, the 40% allocation to bonds has acted as a safety valve for stock risk. However, recent bond market swings have eroded this safety cushion and led investors to seek alternative diversification options.

Last year witnessed significant swings in bond markets, with the worst performance since 2008, causing a decline of 17% in the 60/40 portfolio. The volatility in bonds, combined with the risk of central banks raising interest rates into a recession to combat inflation, has challenged the effectiveness of the 60/40 strategy. The negative correlation between stocks and bonds, which is crucial for the strategy’s success, is being tested in the current environment.

To mitigate these risks, investors are looking for alternative risk mitigation strategies in multi-asset portfolios. The failure of the 60/40 portfolio in 2022, where both stocks and bonds experienced declines, highlighted the need for a more robust and diversified approach. Traditional multi-asset strategies that relied on long-term correlations and capital allocations have proven inadequate in the face of market volatility and changing dynamics.

The Benefits of Alternative Assets

Recognizing the need for a more robust and diversified portfolio, many investors are exploring the potential benefits of incorporating alternative assets. Adding alternatives to a traditional portfolio can help mitigate volatility and enhance risk-adjusted returns. According to J.P. Morgan, incorporating a basket of alternative assets into a 60/40 portfolio can improve returns and reduce volatility. For example, shifting the portfolio to 30% alternatives, 40% equities, and 30% fixed income resulted in increased annualized returns from 8.39% to 9.04% and reduced volatility from 9.66% to 7.97% during the studied period.

Building Modern, Well-Rounded Portfolios

While challenges in accessing alternative assets persist, promising signs are emerging, indicating a shift toward greater inclusivity in the marketplace. An increasing number of alternative asset managers are breaking down the barriers of exclusive investing. To capitalize on these opportunities, individual investors are encouraged to work closely with their advisors to determine how their portfolios can benefit from the inclusion of alternative investments across various asset classes and sectors.

Specifically, advisors often recommend a 10% allocation to private real estate investments, given their potential for stable returns and diversification benefits. However, the ideal allocation will depend on an investor’s specific goals, objectives, and risk tolerance. Increasing awareness and education around the availability of alternative asset investments is a critical first step in future-proofing portfolios and achieving long-term financial goals.

Seeking True Diversification

Investors need to reconsider their approach to diversification and move beyond the traditional reliance on long-term correlations and capital allocations. Diversification should not be limited to asset classes but should also consider the dynamic nature of risk in different market cycles.

The importance of genuine diversification is exemplified by the shifting role of different asset classes over time. For instance, while bonds served as the chief diversifier during the disinflationary trend of recent decades, commodities played that role in the 1970s. Therefore, investors should recognize that no single asset class will consistently offer shelter across market cycles.

The Alternative Hospitality Sector: A Promising Option

Within the realm of alternative assets, the hospitality sector offers an attractive avenue for diversification. Unlike traditional real estate investments, the alternative hospitality sector has sidestepped many of the headwinds facing the industry. Short-term rentals and homeshare-friendly properties have emerged as a safe haven, especially as banks adopt more cautious lending practices.

The short-term rental market has experienced significant growth in recent years, with Europe, North America, and the Asia Pacific region leading the way. The Asia Pacific market, in particular, is projected to be the most promising, driven by increasing tourism and favorable macroeconomic conditions.

Investing in the alternative hospitality sector, such as build-to-rent communities or short-term rental properties, provides an opportunity to tap into a resilient industry that has demonstrated mature performance and reached all-time highs in supply, demand, and total revenue.

Challenges in Accessing Alternative Assets

Despite the potential benefits, accessing alternative assets remains a challenge for many individual investors. Most investment strategies are designed for large institutional investors and insiders, leaving individual investors with limited exposure and opportunities to participate. Even when opportunities arise, they often come in the form of retail shares with less favorable fee structures compared to institutional investments. This leaves you, the individual investor, without ample exposure or opportunity to participate. This means that you’re not getting the full benefit of your investment. And if the status quo continues, there’s a real risk of falling further behind in generating wealth.

But what if there was a way to level the playing field? What if you could gain access to the same high-return opportunities as large institutional investors? We’re here to tell you that there is a way, and the time to act is now. Our team of investment advisors is offering a free, no-obligation 15-minute consultation call. This is your chance to learn about exclusive investment opportunities that are typically reserved for large institutional investors. It’s your chance to break free from the status quo and start generating the wealth you deserve.

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Conclusion

In an ever-changing investment landscape, savvy investors are redesigning their portfolios to adapt to new challenges and opportunities. The traditional 60/40 portfolio is facing headwinds due to major marketplace shifts, including the rise of private market capital. To navigate these changes, investors are increasingly exploring alternative assets that can curb volatility and enhance risk-adjusted returns.

While accessing alternative assets can be challenging, there are promising signs of increased inclusivity in the marketplace. Individual investors are advised to work closely with their advisors to identify suitable alternative investments and build modern, well-rounded portfolios. Furthermore, the volatility in the bond market has prompted investors to seek alternative diversification strategies.

Diversification should not solely rely on long-term correlations and capital allocations but should consider the dynamic nature of risk across different market cycles. The alternative hospitality sector, with its resilience and growth potential, offers a promising avenue for diversification within the alternative asset class.

By embracing alternative assets and staying informed about the evolving investment landscape, investors can position themselves to achieve their financial goals and future-proof their portfolios.