Alternative investments
Alternative investments
Podcast
24.10.2022
In the 1980s and 1990s, investors successfully invested with a 60/40 portfolio. 60 percent of wealth was invested in shares and 40 percent in bonds. The idea behind this: Equities and bonds have a diversifying effect. If equities perform poorly, bonds can compensate for this - and vice versa. This mix offered investors appealing returns with generally low volatility. But is this portfolio still worthwhile or are there more promising alternatives?
The investment strategy that was simple and successful at the time is now more a concept of the past. At that time, shares were still rising relatively steadily, inflation was low and interest rates continued to fall. With a so-called balanced portfolio of equities and bonds, appealing returns could be achieved. However, sustainable, long-term growth will hardly be possible in the future with such a 60/40 mix. Persistent inflation, fears of recession and rising interest rates have weighed heavily on the markets over the past year. In this very challenging capital market environment, static investment strategies quickly reach their limits.
Family offices, asset managers and institutional investors have been focusing on a broader distribution of wealth for years. If you want to diversify your portfolio well, you should therefore consider more asset classes than just equities and bonds. Especially against the backdrop of low interest rates or stock market crises, the private markets and thus the inclusion of alternative investments are gaining in importance. Private market investments such as private equity, private real estate and private debt can reduce the fluctuations of a portfolio and also open up another valuable source of returns.
Alternative investments are therefore generally used to spread risks and achieve long-term growth. Even though private investors have long shown an interest in this asset class, many are still reluctant to invest. Common concerns are, for example, the higher risk profile than with traditional forms of investment and the long-term investment period.
With alternative investments (AI), the capital is usually invested for at least 5 years up to several decades. The long term, which investors often initially see as a disadvantage, ultimately proves to be an advantage. While they lag slightly behind equities and bonds in times of strongly rising markets, they outperform significantly in falling markets. One disadvantage remains: Alternative investments are illiquid. Investors are therefore generally unable to exit their investments at short notice. Anyone thinking about investing in this asset class should therefore consider whether a longer-term holding period is in line with their own life goals.
In addition, some areas of alternative investments do indeed offer a high and unpredictable level of risk. However, as with traditional investments such as equities, fixed-income securities, etc., there are also more stable and riskier strategies for the private markets. By weighting high-risk and low-risk investments, the risk/return profile of the overall portfolio can be adapted to the respective requirements.
In view of a portfolio allocation with alternative investments, there is no universally valid rule that can be applied as a percentage to every asset structure like the 60/40 rule - for example, the personal risk preference and the individual objectives of the asset holder always play a key role here.
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If we compare two portfolios enriched with alternative investments with a simple 60/40 portfolio in the period from 12/2001 - 12/2021, both have higher returns than the classic 60/40 portfolio.
An admixture of 30% alternative investments to a classic equity-bond portfolio shows significant added value over the period under review. If this addition were increased to 60 percent, an additional return of 2 percent p.a. could have been generated compared to the classic 60/40 portfolio.
By incorporating alternative investments, investors can therefore expand their investment universe and expect higher returns - while at the same time reducing volatility. This allows them to remain patient and calm even in a turbulent market environment. We expect the attractiveness of alternative investments to continue in the coming quarters and that the asset classes will continue to deliver attractive performance and stability benefits.
We have reported on the alternative asset class of private equity in this blog post: Opportunities of Private Equity
Note: Background to the selected asset allocation: Based on the typical 60% equities / 40% bonds allocation, we calculate an allocation with the addition of 30% and 60% alternative investments. Alternative investments are represented here by real estate and private equity. The reduction of equities and bonds and the addition of real estate and private equity is done in equal percentages. Further information on the alternative investment indices used: Private equity = The Cambridge Associates Global Buyout & Growth Index consists of 1,747 funds with a total asset value of EUR 2.24 trillion as at December 31, 2021; real estate = The INREV Index is a performance index for European, unlisted real estate funds with core and value-added manager style, at least 90% of which invest in Europe. As at December 31, 2021, the index comprises 321 funds and represents a total gross asset value (GAV) of 310.4 billion euros. Past performance of an index, benchmark or other measure is not a reliable indicator of future performance.
Alternative investments
24.10.2022
Torsten Murke
Since the beginning of the year, investors with a classic 60/40 portfolio allocation have experienced a hefty loss. The time has long since come to rethink this portfolio mix, because the world is not just made up of equities and bonds.
In the 1980s and 1990s, investors successfully invested with a 60/40 portfolio. 60 percent of wealth was invested in shares and 40 percent in bonds. The idea behind this: Equities and bonds have a diversifying effect. If equities perform poorly, bonds can compensate for this - and vice versa. This mix offered investors appealing returns with generally low volatility. But is this portfolio still worthwhile or are there more promising alternatives?
The investment strategy that was simple and successful at the time is now more a concept of the past. At that time, shares were still rising relatively steadily, inflation was low and interest rates continued to fall. With a so-called balanced portfolio of equities and bonds, appealing returns could be achieved. However, sustainable, long-term growth will hardly be possible in the future with such a 60/40 mix. Persistent inflation, fears of recession and rising interest rates have weighed heavily on the markets over the past year. In this very challenging capital market environment, static investment strategies quickly reach their limits.
Family offices, asset managers and institutional investors have been focusing on a broader distribution of wealth for years. If you want to diversify your portfolio well, you should therefore consider more asset classes than just equities and bonds. Especially against the backdrop of low interest rates or stock market crises, the private markets and thus the inclusion of alternative investments are gaining in importance. Private market investments such as private equity, private real estate and private debt can reduce the fluctuations of a portfolio and also open up another valuable source of returns.
Alternative investments are therefore generally used to spread risks and achieve long-term growth. Even though private investors have long shown an interest in this asset class, many are still reluctant to invest. Common concerns are, for example, the higher risk profile than with traditional forms of investment and the long-term investment period.
With alternative investments (AI), the capital is usually invested for at least 5 years up to several decades. The long term, which investors often initially see as a disadvantage, ultimately proves to be an advantage. While they lag slightly behind equities and bonds in times of strongly rising markets, they outperform significantly in falling markets. One disadvantage remains: Alternative investments are illiquid. Investors are therefore generally unable to exit their investments at short notice. Anyone thinking about investing in this asset class should therefore consider whether a longer-term holding period is in line with their own life goals.
In addition, some areas of alternative investments do indeed offer a high and unpredictable level of risk. However, as with traditional investments such as equities, fixed-income securities, etc., there are also more stable and riskier strategies for the private markets. By weighting high-risk and low-risk investments, the risk/return profile of the overall portfolio can be adapted to the respective requirements.
In view of a portfolio allocation with alternative investments, there is no universally valid rule that can be applied as a percentage to every asset structure like the 60/40 rule - for example, the personal risk preference and the individual objectives of the asset holder always play a key role here.
If we compare two portfolios enriched with alternative investments with a simple 60/40 portfolio in the period from 12/2001 - 12/2021, both have higher returns than the classic 60/40 portfolio.
An admixture of 30% alternative investments to a classic equity-bond portfolio shows significant added value over the period under review. If this addition were increased to 60 percent, an additional return of 2 percent p.a. could have been generated compared to the classic 60/40 portfolio.
By incorporating alternative investments, investors can therefore expand their investment universe and expect higher returns - while at the same time reducing volatility. This allows them to remain patient and calm even in a turbulent market environment. We expect the attractiveness of alternative investments to continue in the coming quarters and that the asset classes will continue to deliver attractive performance and stability benefits.
We have reported on the alternative asset class of private equity in this blog post: Opportunities of Private Equity
Note: Background to the selected asset allocation: Based on the typical 60% equities / 40% bonds allocation, we calculate an allocation with the addition of 30% and 60% alternative investments. Alternative investments are represented here by real estate and private equity. The reduction of equities and bonds and the addition of real estate and private equity is done in equal percentages. Further information on the alternative investment indices used: Private equity = The Cambridge Associates Global Buyout & Growth Index consists of 1,747 funds with a total asset value of EUR 2.24 trillion as at December 31, 2021; real estate = The INREV Index is a performance index for European, unlisted real estate funds with core and value-added manager style, at least 90% of which invest in Europe. As at December 31, 2021, the index comprises 321 funds and represents a total gross asset value (GAV) of 310.4 billion euros. Past performance of an index, benchmark or other measure is not a reliable indicator of future performance.
About the author
Torsten Murke
Torsten Murke is one of the founders of FINVIA. As Chief Executive Officer (CEO), he is responsible for the company's strategy and development.
Having worked in investment banking at international banks for almost three decades, he has successfully advised on numerous complex client situations, including the partners of Sauerborn Trust and Feri Trust. As Head of Corporate & Institutional Banking at BNP Paribas in Germany for many years, he developed BNP Paribas into one of the market leaders in Germany. With his broad network of contacts built up over decades and his experience in all aspects of corporate transactions and corporate finance, he completes FINVIA's offering.
