By Tim Clift, Chief Investment Strategist at Envestnet / PMC and Jon Diorio, Managing Director, Product and Platform Group at BlackRock
As today’s advisors think about the sophisticated needs of high-net-worth clients, more and more are looking for ways to navigate the challenges presented by a low-yield environment and lower-than-expected investment returns. We believe advisors must think about diversifying beyond traditional equity and fixed-income portfolios to other return drivers so they can help clients stay on track toward achieving their long-term investment goals.
In our latest Sharing Perspectives whitepaper, “Portfolios under pressure: Help clients earn more with alternatives,” we highlight our shared perspectives on the importance of alternative assets in the portfolio construction process. While the investment landscape is ever-changing, we believe we are entering a new market regime. Today, investors require truly differentiated sources of portfolio returns.
The traditional 60% stock and 40% bond portfolio has been under pressure thus far in 2022 with both stocks and bonds posting negative returns. As a result, we believe there is a strong need to get differentiated return drivers into a portfolio to navigate this difficult environment.
Alternative Portfolio Construction: Three emerging trends to watch
We see three growing trends taking shape across the alternatives landscape.
1. The democratization of alternatives and advances in technology are increasing access
There is an acceleration in the adoption of alternative strategies in client portfolios, with no signs of slowing down. In fact, according to Cerulli, advisors report alternative allocations taking up 10.5% of their portfolios and expect this to increase to 11.8% in two years.1
Because of innovation and access, interest in alternatives has never been higher for advisors and investors. Advisors are interested in offering their clients new opportunities, and many investors are ready to embrace new options. But more work is needed to help educate investors on the potential risks, what is available and how to access it.
2. Private markets are creating more opportunities: Private equity and private credit
Today, most of a company’s growth takes place in the private markets before an initial public offering. The number of private companies with more than 100 employees has grown almost 40% over the last 30 years, while the number of public companies has declined by a comparable but slightly smaller amount.2 We believe this reflects a shift in preference for private financing among business owners. Similarly, private credit strategies can offer the opportunity to produce consistent returns across a broad range, from opportunistic and distressed debt to middle-market investing and specialty finance.
We see a shift of wealth creation toward private equity. Alternatives now give access to private markets, such as private equity, private credit, infrastructure, and private real estate.
3. A focus on alternative investment outcomes is taking center stage
Because many types of alternatives encompass exposure to a wide range of strategies, knowing “what” you are buying and “why” is increasingly crucial as you think about the role within a client’s portfolio. Whatever alternative allocation you recommend, be sure it is the most appropriate and effective strategy to help accomplish the client’s investment objectives. For example, you might look to diversify when seeking low to moderate correlation to core equities with different return drivers and amplify when seeking higher returns than core equities in less liquid markets.
With new technology available today, you can offer clients more transparency around the return and outcome expectations for the alternative strategies you recommend. Technology and data can help you better understand significant differences across and within alternative categories, helping you match the intended outcome to the appropriate solution.
Learn More About Ways to Incorporate Alternatives
Whether you are already talking to clients about incorporating alternatives into their portfolios or looking to gain more knowledge to help them think about the opportunity and find the right entry point, we are committed to helping you uncover the right opportunities.
With the Alternatives Exchange, a partnership through Envestnet, UBS and iCapital, you now have access to private market investment opportunities, with more than 35 funds available from managers across geographies and strategies. This offering includes access to iCapital’s enhanced technology and processing capabilities, along with the AltsEdge™ Certificate Program, the award-winning3 educational initiative jointly created by iCapital and Chartered Alternative Investment Analyst (CAIA) Association. This comprehensive program is designed to help advisors build their knowledge of the alternative investment space and how this asset class can potentially benefit their clients.
Envestnet and BlackRock allow access to a variety of investment vehicles and technology solutions to help – from alternative investment solutions to BlackRock’s Expected Return Analyzer. This tool lets you test your current portfolio against forward-looking projections and may help you identify how a portfolio stacks up against a targeted return and highlights potential gaps.
1. Cerulli Associates: Advisor Use of Alternative Investments in 2021.
2. National Venture Capital Association, data as of 12/31/19 and data derived on 9/15/2021 from article “Median firm valuation before initial public offering (IPO) in the United States from 2000 to 2020. 3. Barron’s/MMI 2021 Industry Award Winner, Thought Leadership/Education.
3. Barron’s/MMI 2021 Industry Award Winner, Thought Leadership/Education.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
Tools on BlackRock’s Advisor Center are offered exclusively for financial professionals. Certain tools allow for the generation of client reports.
IMPORTANT: The projections or other information generated by certain Advisor Center tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.
Through a holding company subsidiary, BlackRock, Inc. (“BlackRock”) owns a non-controlling interest in Envestnet’s parent company, Envestnet, Inc. (NYSE: ENV).
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. As with all investments, there is no assurance that alternative investment strategies will achieve their objectives or protect against losses.
Advisors should always conduct their own research and due diligence on investment products and the product managers prior to offering or making a recommendation to a client. Envestnet and its affiliates do not provide research or product oversight on alternative investments. Past performance is not indicative of future results.