Alternatives & Strategic Asset Allocation Creating a robust framework for private investors

Creating a robust framework for private investors

Alternative investments are an increasingly important asset class. In this report we look at the reasons for this, discuss the types of alternative investments available and try to disentangle perceptions around alternatives from the reality – for example, with regards to return expectations.

The world of alternatives is, by its nature, broad and diverse. However, in this report we focus on alternative investments via private markets and the specific issue of how an effective asset allocation process can make the most of their inclusion in an investment portfolio.

Investors have traditionally looked to alternative investments for many things – income, capital growth, inflation protection, support against market stress, or simply exposure to long-term secular themes. All these are valid objectives, although it is important to be clear what is realistically possible. It is also important to understand the different types of risk involved in alternative investments.

Alternative investments are often considered on their individual merits. But, to us, the benefits of alternatives may be most evident in a portfolio context. As we explain, alternative investments may offer new ways to better diversify portfolios, in a way that investing only in public markets can find difficult.

Understanding of how an investor can successfully embed alternatives in a portfolio managed on the basis of an effective strategic asset allocation (the key to investment success) must however go well beyond a simple attempt at asset diversification. There are many other ways it can be used to change a portfolio’s risk/return characteristics. We therefore conclude the report with a more conceptual discussion of the need to balance portfolio robustness with efficiency, to what extent including alternatives can help us do this, and the key issues around investment time horizon and assumptions.

This promises to be a very exciting few years for alternative investments. This space has been adjusting, generally successfully, to the likelihood of “higher for longer” interest rates. A renewed political will to increase infrastructure investment will also create interesting new opportunities in many private markets.

But making the most of these developments will involve effective integration of alternative investments into investor portfolios. We hope that you find the ideas in this report on how to do this interesting.

Christian Nolting
Global Chief Investment Officer