Displaying items by tag: diversification

A recent report on real estate holdings of institutional investors revealed that while their allocation to the asset class remained level from 2022 to 2023, the allocation in the preceding decade increased by 190 basis points, a jump of 20%.

Historical data underscores the potential benefits of private real estate. A whitepaper from TIAA—a respected organization established by Andrew Carnegie in 1918 to support teacher retirements—highlights the performance of private real estate over a two-decade span. From 2000 to 2020, private real estate exhibited a very low correlation with stocks, bonds, and listed REITs. This suggests that incorporating private real estate into a portfolio could enhance diversification, which is crucial for managing risk.

Moreover, private real estate has traditionally been an effective hedge against inflation. As inflation erodes the purchasing power of money, the tangible asset class of real estate often sees its value and the income it generates keep pace with or exceed inflation rates, thereby preserving the real value of an investor's income.

For financial advisors, the strategic inclusion of private real estate in client portfolios can provide a twofold advantage: diversification benefits and protection against inflation. This can be especially valuable during periods of market volatility and rising prices, helping clients to achieve a more stable and resilient investment outcome.

Finsum: Real estate’s diversification and inflation hedging benefits are among the reasons why institutional investors continue to maintain their increased allocation to the asset class.

Gold prices ended the year on a strong note by making all-time highs and finished the year with a 13% gain. Next year, the outlook remains bullish due to expectations that real interest rates will decline as inflation falls and the Fed shifts to a dovish policy, leading to increased demand. JPMorgan has a year-end forecast of $2,300.

Some of the factors that could lead to gold outperforming are the economy being weaker than expected which could lead to more aggressive cuts by the Fed. Additionally, there is a risk that geopolitical tensions could inflame even further whether it’s in the Middle East or the conflict between Russia and Ukraine. Budget deficits in the US remain high for the foreseeable future with another close and contentious presidential election on the horizon.

Another positive catalyst for gold prices is that central banks are net buyers. According to the World Gold Council, they will purchase between 450 and 500 tons in the upcoming year. This is in addition to strong investing demand from ETFs which have seen substantial increases in assets over the past year.

The major risk to the outlook is if the economy remains robust enough so that the Fed can keep the fed funds rate elevated for a longer period of time. During the last 2 ‘soft landings’, gold had a total return of -1.6%, while Treasuries returned 16% and equities were up 33%.

Finsum: Gold prices are flirting with all-time highs. Recent catalysts for strength include geopolitical turmoil and expectations that the Fed is in the midst of a pivot.  

The cornerstone of modern portfolio theory rests on the principle of diversification – seeking uncorrelated assets to mitigate risk and enhance returns. Traditionally, stocks and bonds have been the primary players in this diversification game. However, crypto assets, often perceived as a volatile outlier, presents a curious proposition: could they hold the key to enhanced portfolio resilience?

Recent research suggests the possibilities. A study examining the correlation between Bitcoin and major market indices from early 2021 to mid-2023 revealed a noticeably low relationship. Compared to the S&P500 index, Bitcoin's 90-day correlation ranged from about 0.0 to 0.6. As compared to an aggregate bond index, Bitcoin's correlation ranged roughly between -0.3 and 0.3. Investors should consider all risks before adding an asset to their portfolio. Still, these results indicate that, in recent historical periods, Bitcoin has provided a diversification option for advisors and investors looking for ways to smooth their portfolio returns.

Of course, crypto's nascent nature and past volatility warrant caution. Unlike more traditional asset classes, crypto has yet to experience multiple economic cycles, leaving its long-term behavior yet to be seen. However, its recent low correlation with traditional assets presents an intriguing opportunity for portfolio optimization.

Finsum: Bitcoin’s recent correlation with traditional asset classes offers an intriguing proposition: can it help mitigate overall portfolio risk?

Over the next few years, it’s expected that alternative assets will become a larger part of client portfolios. Advisors will have to contend with a changing landscape especially as more products will be introduced that are more complicated in terms of taxes and reporting. 

A looming challenge for advisors will be handling the increased workload as well as understanding these products in a comprehensive manner in order to explain it to their clients. It’s likely that asset managers will form partnerships with RIAs in order to help them navigate and simplify the process. Already, some asset managers have started to invest in efforts to educate advisors, but more will be necessary given the increase in the number of options.

According to Ernst & Young America's Financial Services, some advisors will increase allocation to alternatives to 10% or more. In the near-term, private credit products will see the strongest growth as they are seen as less risky while offering higher yields than fixed income.

In addition to private credit, most exposure to alternatives currently is through liquid alt mutual funds, liquid alt ETFs, and publicly-traded REITs. Over the next couple of years, areas forecast to have the highest growth in terms of assets are cryptocurrencies, digital assets, hedge funds, private equity, and private debt. 

Finsum: The alternative assets space is expected to heat up in the coming years. One challenge for advisors will be to understand these products and handling an increased workload. 

JPMorgan issued its 28th annual Long-Term Capital Markets Assumptions report, which provides long-term forecasts for various asset classes in addition to detailing risks and upside catalysts. One of the recommendations in its report is to add a 25% position to alternative investments which it believes will increase returns by 60 basis points on an annual basis while also reducing volatility. 

In terms of the 60/40 portfolio, JPMorgan is forecasting annual returns of 7% which is a slight decrease from last year’s forecast of 7.2% annual returns. Pulkit Sharma, JPMorgan’s head of real assets and alternative investment strategy, remarked, “The alternative asset classes are becoming more essential than optional in the broader 60/40 toolkit. Inflation is going to be more and more sticky, so you need more diversifiers and inflation-sensitive asset classes.” 

The bank also believes that investors need to seek out diversification especially, since it expects continued geopolitical uncertainty and volatility stemming from central bank decisions. Fixed income is simply not an effective diversifier in higher-inflation environments as evidenced by the last couple of years. Some of the alternative assets it recommends boosting diversification are real assets, hedge funds, and private credit. 

Finsum: In its annual long-term review and forecast of various asset classes, JPMorgan slightly reduced its expectation of long-term returns for a 60/40 portfolio and stressed the role of alternatives to boost returns and improve diversification.