Use three Guide to Alternatives slides to support client conversations on the opportunities in alternatives.
Adding alternatives may help optimize risk/return
Public asset classes are facing challenges from elevated valuations, low real yields and positive correlation. For those willing to venture outside a traditional stock-bond allocation, adding a sleeve of alternatives may help enhance returns and reduce volatility. However, different alternatives play different roles in portfolios. Investors should first identifying their goal, then invest in the alternative asset class with the attributes to achieve it.
Exhibit 1: Alternatives and portfolio risk/return
Annualized volatility and returns, 1Q90 – 1Q24
Source: Bloomberg, Burgiss, FactSet, HFRI, NCREIF, Standard & Poor’s, J.P. Morgan Asset Management. Alts includes equal weight to hedge funds, real estate and private equity. Stocks = S&P 500 TR Index, bonds = Bloomberg U.S. Agg. TR Index. Volatility calculated as the annualized standard deviation of quarterly returns. Portfolios are rebalanced at the start of the year. Data are based on availability as of August 31, 2024. Guide to Alternatives, page 7.
Investors are seeking alpha, income and diversification
In general, alternatives can enhance return potential, increase income or provide diversification, depending on which asset class is selected. For instance, private equity may enhance returns, but may not prioritize income or diversification. Real assets, like real estate and infrastructure, on the other hand, exhibit low or negative correlation to a 60/40 portfolio and often provide stable income and inflation protection.
Exhibit 2: Correlations, returns and yields
10-year correlations and 10-year annualized total returns, quarterly, 2Q14-1Q24
Source: Burgiss, Cliffwater, FactSet, Gilberto-Levy, HFRI, MSCI, NCREIF, J.P. Morgan Asset Management. *CML is commercial mortgage loans. 60/40 portfolio is 60% stocks (S&P 500 TR Index) and 40% bonds (Bloomberg U.S. Agg. TR Index). Data are based on availability as of August 31, 2024. Guide to Alternatives, page 8.
Manager selection is critical
The performance difference between top and bottom managers compounds over time and can impact long-term returns sizably. Manager dispersion is particularly acute in private markets, which are newer and have a wide range of investing approaches. To unlock the return-enhancing potential of alternatives, investors must select an effective manager.
Exhibit 3: Public and private manager dispersion
Based on returns over a 10-year window (%)*
Source: Burgiss, Morningstar, NCREIF, PivotalPath, J.P. Morgan Asset Management. *Manager dispersion is based on annual returns over a 10-year period ending 2Q 2024 for Hedge Funds, U.S. Core Real Estate, U.S. Fund Global Equities and U.S. Fund Global Bonds. Non-core Real Estate, Global Private Equity and Global Venture Capital are represented by the 10-year horizon internal rate of return (IRR) ending 1Q 2024. U.S. Fund Global Equities and Bonds are comprised of U.S.-domiciled mutual funds and ETFs. Data are based on availability as of August 31, 2024. Guide to Alternatives, page 9.