Why invest in alternative assets?Contributor Vincent Juvyns
For long term investors able to forego some liquidity, a strategic allocation to alternatives assets could help to improve the overall risk/return profile of their portfolio.
Persistently low government bond yields are creating two problems: a lack of income, and limited opportunity to diversify a portfolio as the cycle matures. Alternative assets might help in both regards.
There is no alternative…really?
The post-crisis economic expansion has been long but relatively anaemic. In this environment, few central banks have been able to normalise either interest rates or their balance sheets, and investors have, as a result, struggled to achieve the desired yield on their investments. Frequently we hear investors state that there is no alternative but to stay exposed to risk assets at the expense of low yielding safe assets.
While this strategy worked well throughout most of the economic cycle, as the cycle ages we believe investors should be considering options to increase the resilience of their portfolios in order to be prepared for an eventual downturn.
We acknowledge that this is easier said than done in a world where core government bond yields are low, particularly here in Europe. The scope for government bond prices to rise to offset any decline in stock prices is more limited than it was in previous downturns. Cash in Europe-with negative real returns-is a similarly unattractive proposition.
As a consequence, investors might need to rethink diversification and expand their horizon beyond traditional asset classes in order to increase the resilience of their portfolio while generating positive real yields. The good news is that there are alternatives.
What are alternative investments?
Alternative strategies are usually defined as investments in assets other than stocks, bonds and cash. They include investments in private assets (which are not publicly listed) or investment strategies that use non-traditional approaches, such as the ability to benefit if stocks fall. It is a broad and heterogeneous universe that can be divided into two main categories: the “return-enhancers” and the “diversifiers”.
Exhibit 1-taken from our recent publication Guide to Alternatives—shows the yield on offer in many of the core alternative markets. The “return enhancers” are strategies, such as private credit or private equity, which seek to generate returns in excess of public markets. There is of course no free lunch. The higher yield compensates investors for a lower level of liquidity in these markets. However, this may not be a problem for longer-term investors that can hold assets through the cycle.
Exhibit 1: Yield alternatives
Asset class yields, %
Today’s top questions
How will the Brexit negotiations conclude?
Why invest in alternative assets?
Finding income in a low yield environment
Are emerging market assets worth the volatility?
Is the flattening yield curve a sign of trouble ahead?
Europe at a crossroads: Recession or turnaround?
Picking the right team: Value or growth?
How should we prepare portfolios for the next downturn?
Visit the archive of questions and responses
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.