Alternative assets and investment strategies continue to transition from optional to essential. As laid out in our 2022 Long-Term Capital Market Assumptions, the expected return for a 60/40 stock/bond portfolio over the next 10 to 15 years is a mediocre 4.3%, well below what many investors will need to generate in order to achieve their long-term goals. Against this backdrop, we see opportunities across the spectrum of alternative assets and strategies to generate income, enhance returns and further diversify portfolios. As always, however, we advocate for an outcome-oriented approach; first, investors need to determine the challenge they are working to address and then determine the asset that will provide the intended solution.

When it comes to generating income, core real assets are the first place to look. The commercial real estate sector has continued its uneven recovery in 2021, with vacancy rates in the industrial and multi-family housing sectors sitting at or near their lows. On the other hand, the office and retail sectors continue to come back online as workers return to the office and shoppers return to the stores. The coming year should see a continued recovery in these sectors as the pandemic fades into the background.

Exhibit 10: The pandemic has impacted different real estate assets in different ways

percent

Source: NCREIF, J.P. Morgan Asset Management. Data is based on availability as of November 30, 2021.

Infrastructure assets continue to look attractive in a low-rate world, particularly given the risk that inflation remains elevated over the medium term — many of these assets can pass along any increase in cost to the end consumer to protect their return on equity from higher input prices. Meanwhile, transportation assets should continue to benefit from supply chain disruptions, whereas other real assets like timber can generate income and help offset carbon emissions in a world where sustainability is increasingly in focus. Finally, for investors that need more liquidity, covered call and strategic income strategies can help solve the income conundrum.

Private equity investors continue to embrace technology companies despite elevated valuations, and this should continue in 2022. However, it would not be surprising to see an increase in activity in those sectors hit hardest by the pandemic, particularly if it does fade over the course of the coming year. Private credit, and particularly direct lending strategies, are another way of generating income; furthermore, while the leveraged loan market continues to be characterized by covenant-lite deals and earnings adjustments, the quality of the loans being made on the private side is much higher.

Exhibit 11: Software remains a key focus for private equity investors

% U.S. PE deals targeting software companies, software INV. % GDP

Source: BEA, FactSet, Pitchbook, J.P. Morgan Asset Management. Software investment is represented by nonresidential fixed investment in software. Deal, exit and investment data are as of June 30, 2021. Data is based on availability as of November 30, 2021.

Public markets have generated fantastic performance over the past two years, but we expect that returns will be lower and volatility will be higher going forward. Furthermore, while interest rates should rise, they will likely only do so gradually. At the end of the day, it will be essential for investors to embrace alternatives going forward as they navigate a world characterized by muted expected returns, historically low interest rates and elevated volatility.