Hi, I'm Aaron Mulvihill, Global Market Strategist at J.P. Morgan Asset Management. Welcome to our first quarterly update of 2025 of the Guide to Alternatives. Our aim is to provide you with insights into how alternatives can enhance your portfolio and keep you updated on trends in the alternative investment landscape.

As we round out the first quarter of 2025, with U.S. equities showing a tepid performance year-to-date and ongoing volatility in bond markets, the case for adding alternatives to portfolios right now is particularly compelling.

The data we’ll look at in a moment shows that investors are increasingly allocating to alternatives to bring alpha, income, and diversifaction to their portfolios. Let’s explore these 3 advantages and then look at some trends we’re seeing in infrastructure, private equity and real estate.

[Slide 4: Earnings/coupon yield and the 60/40]

This slides explores the returns question and shows that the high valuations in public markets today imply lower than average returns in the future.

We calculate a measure called the "earnings/coupon yield" for a 60/40 portfolio. This metric combines the forward earnings yield of the S&P 500, weighted at 60%, with the yield to worst on the Bloomberg U.S. Aggregate Bond Index, weighted at 40%.

The earnigs coupon yield concept essentially asks: “What’s the return potential based on today’s prices”. Think of it as comparing a home’s purchase price to its potential rental income in the future.

The chart on the left illustrates how the 60/40 portfolio has become more costly over time, while the right side indicates that higher initial valuations suggest lower long-term returns. What this suggests is investors might need to consider opportunities beyond traditional stocks and bonds to meet their return targets.

[Slide 16: Alternative asset class returns vs. selected portfolios]

This slide demonstrates how a portfolio with a 20% allocation to alternatives since 2014 has outperformed a traditional 60/40 portfolio, with reduced volatility

While this model portfolio is illustrative, it can be a helpful starting point when considering the benefits of adding alternatives to a portfolio and indicates how that portfolio might have performed in different market environments. We also show how different classes of alternative assets have performed over time.

Alpha-generating asset classes, such as Private Equity, have historically delivered returns exceeding those of public markets over the long term. Meanwhile, investments like Infrastructure exhibit lower volatility and serve as effective diversifiers.

[Slide 12: Yield alternatives]

Finally for income-focused investors, while short term yields are expected to stay relatively high in the medium term as inflation persists, we do expect volatility in the bond markets so some investors are looking for alternatives to bonds to complement the fixed income part of their portfolio.

This slide shows how alternative investmets, the grey bars, stack up against public fixed income in blue and equities in green in terms of yields. Asset classes like infrastructure, transportation and real estate can offer very compelling yields relative to traditional fixed income.

[Slide 8: Alternatives: Correlations, returns and yields]

Now to the question of which alternative investments are right for your portfolio.

The choice of alternative assets should align with the specific portfolio outcomes you aim to achieve. This slide highlights the diverse roles alternatives can play. At the top of the chart, you'll find the highest-returning asset classes. The size of the bubbles represents yield, with larger bubbles indicating higher yields. Diversifiers are positioned in the middle and left side of the chart.

For example, if your goal is to generate consistent income, focus on the asset classes with larger bubble sizes, such as private credit or real assets like infrastructure and transportation.

[Slide 15: Investor positioning]

While institutional investors have maintained larger allocations to alternatives for some time, individual investors are increasingly incorporating these assets in their portfolios, and that is a trend we are paying close attention to.

This trend is facilitated by innovations in investment products that offer greater liquidity and lower investment minimums, broadening access for individual investors.

Now let’s turn to some interesting trends that we’d like to highlight this quarter.

[Slide 44: U.S. electricity generation]

Infrastructure as an alternative asset is known for stable yields, because it’s linked to critical assets that are the backbone of the economy. The latest data from the US Department of Energy shows that electricity generation grew 3% in 2024. While 3% might not sound like much, to put it in perspective we have seen almost no growth in the past 2 decades. This new demand is creating investment opportunities in grid infrastructure such as solar and gas generation. We expect AI and electric vehicles to put further demands on the grid over the next decade, making this an opportune time to consider investing in infrastructure.

[Slide 24: Global mergers and acquisitions]

The volume of M&A transactions increased in 2024 relative to 2023, an encouraging sign for the outlook of the private equity market. Looking forward into 2025 we’ll be monitoring M&A activity closely. The potential for clarity on taxation policy, and new leadership in key government agencies , could further support corporate dealmaking, benefitting private equity.

[Slide 24: U.S. real estate: Office leasing activity]

In our 2025 outlook released in January we highlighted improving trends in real estate. We are seeing this play out, but it's important to emphasize the diversity within the real estate market, with different trends impacting various sectors. In the office sector, this chart illustrates a significant disparity. The newest and highest quality properties in major city centers are benefitting from the post-COVID return to work, while older stock is not experiencing the same recovery.

Thois disparity together with attractive valuations in the real estate market creates opprtunities for skilled managers to generate alpha.

[Slide 9: Alternatives and manager selection]

This brings us to the topic of manager selection. Here we look at the difference in performance of investment funds within various alternatives asset classes. While median returns are typically attractive relative to public markets, the disparity in performance between top and bottom quartile funds can be substantial. Not all managers can consistently generate positive alpha. This serves as a reminder to investors that due diligence and manager selection are crucial when it comes to alternative assets.

Thank you for joining us for this quarterly update. For comprehensive coverage of ALL these asset classes, including private equity, private credit, hedge funds, real estate, and transportation… please visit our website at jpmorgan.com/GTA to access the full Guide to Alternatives.

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