Are we at an inflection point with alternatives?
At the latest Crestone Investment Forum, held on 22 February 2022, we asked panelists to share their views on the likely path of markets and the global economy in 2022. Key issues focused on the likely persistence of inflation, whether central banks could manage inflation lower without damaging the economic recovery, and when fixed income assets would become attractive.
- Ben Powell - Chief APAC Strategist, Blackrock
- Steven Watson - Portfolio Manager, Captial Group
- Catherine LeGraw - Asset Allocations Strategist, GMO
- Bill Callanan - Chief Executive Officer, Syzygy Investment Advisory
- Stan Shamu - Senior Portfolio Strategist, Crestone Wealth Management
- Scott Haslem - Chief Investment Officer, Crestone Wealth Management
Given their low correlation to traditional asset classes, alternative investments have become popular among investors who are looking for ways to offset market volatility and generate higher returns during periods of low yields. While panellists were broadly constructive about alternatives and the opportunity set they offer, there was some concern about current valuations. Panellists highlighted the importance of manager selection and the need to be selective about investment opportunities.
Watson is concerned about private market valuations, particularly given the current gap between public market and private market valuations. The market has been enthusiastic about alternatives for a long time and he feels returns may disappoint. He feels there are plenty of listed companies that provide exposure to long duration assets at attractive prices.
Powell is positive on alternatives, particularly in the context of bonds not generating enough return for portfolios. However, he recognises that private markets do not offer the same degree of transparency as public markets. Processes will need to be put in place so investors can sift through opportunities more rigorously and identify the better investments. He cautions that it is not an asset class where one can take a blanket approach to investing.
“We are all obliged by the math to be a bit more creative in where we source income and broader portfolio returns.”
As we appear to be at an inflection point, LeGraw is very cautious about long duration assets and locking up capital. She sees value in being nimble and commented that some investors feel their private market portfolios are ‘growthy’. This is prompting them to look at ways to balance this at an overall portfolio level, since exposure to private markets cannot necessarily be trimmed.
She feels that liquid alternatives present a great opportunity set—spread strategies that take advantage of the spread in valuations are top decile or quartile opportunities because the spread is so wide. Examples of this are merger spreads, spreads within commodities, and spreads within currencies. LeGraw remains cautious on real assets, where she feels there is just as much volatility and repricing risk although this might not be felt immediately. She maintains that if equities are expensive, so is everything else.
Callanan added that liquid alternatives are particularly attractive as they are more competitively priced. They also provide sources of alpha to long duration pools of capital and offer a transparent research process, better alignment of fees, and are not just a management fee aggregation process. The business model is also changing for liquid alternatives where you have much more sophisticated long duration pools of capital in terms of how they allocate.
Callanan added that the venture capital and private world is already witnessing a scramble for cash and capital calls. This will likely put a lot of pressure on endowments and larger institutions that are over-invested in the private and venture space. This will be exacerbated by the fact their public equity portfolios will also be down significantly, leading to a race for cash and creating a significant source of stress.
The Crestone view:
Within alternatives, we continue to favour core real assets and private debt, while highlighting the ongoing importance of manager selection.
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This article is an excerpt from our most recent Investment forum. You can access more insights from our panel here.
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