For many years, the 60/40 equity-to-fixed income portfolio was the investment standard for a diversified portfolio. The expectation was that the growth would come primarily from the 60% allocated to equities; income and capital preservation would come from the 40% allocated to fixed income; and investors would receive diversification benefits because of the low correlation between the two asset classes. But what if the future isn’t like the past? What if future returns aren’t as strong as historical results?
Many capital market assumptions (CMA) are projecting equity returns over the next several years to be well below their long-term historical average and the strong recent performance over the last 10 years of 13.7%.1 The average CMAs from a sample of top-tier firms is projecting a 5.6% return of the U.S. equity markets, and 4.4% return from the traditional 60/40 portfolio over the next 10-15 years.2
CMAs forecast lower returns over the next 10-15 years
U.S. Public Equities = S&P 500; Total Return, US Aggregate Bonds = Bloomberg Barclays U.S. Aggregate Index; 60/40 = 60% U.S. Equities and 40% U.S. Aggregate Bonds
Source: Blackrock, JP Morgan, BNY, UBS and Morgan Stanley Updated as of June 2020.
Source: FactSet and iCapital calculations. Data from October 2010 to September 2020. For illustrative purposes only.
Furthermore, public equities have become more correlated with each other over time, due in part to the rise of passive strategies (index funds and ETFs). Similarly, traditional asset classes have also moved together in recent years. That is the environment we find ourselves in today.
Adding alternatives may improve risk-adjusted return
In order to achieve a client’s goals and objectives, wealth advisors may need to consider alternative sources of return and income that are less correlated with traditional asset classes. Alternative Investments – private equity, private credit managers and hedge funds – are valuable tools in responding to these challenges.
For example, the forward-looking capital market assumptions for private equity by leading fund managers – including J.P. Morgan, Morgan Stanley, UBS, Hamilton Lane, and BlackRock – project an approximately 300-basis point illiquidity premium over public equities.3 While the projections for private equity are also lower than their historical averages, they are still higher than their public market counterparts. As a result, alternative investments may be a valuable tool to help your clients achieve their long-term goals and objectives.
New technology-enabled platforms have made these once elusive investments more accessible to high-net-worth investors by aggregating individual commitments into vehicles like feeder funds so that private fund managers need only deal with a single entity. Consequently, these managers have been motivated to adopt these technologies in order to diversify their investor base and gain exposure to the multi-trillion-dollar pool of high-net-worth capital that was previously inaccessible to them.
Wealth advisors should take the time to discuss the investment merits, risks, and structural considerations of alternative investments and determine whether some or all of the underlying strategies are appropriate to meet their client’s long-term goals and objectives.
(1) Source: Based on Capital Market Assumptions from Blackrock, JP Morgan, BNY, UBS and Morgan Stanley. Updated as of June 2020.
(2) Source: Based on Capital Market Assumptions from Blackrock, JP Morgan, BNY, UBS and Morgan Stanley. Updated as of June 2020.
(3) Source: Based on Capital Market Assumptions from Blackrock, JP Morgan, BNY, UBS and Morgan Stanley. Updated as of June 2020.
This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Institutional Capital Network, Inc. or its affiliates (together “iCapital Network”). Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital Network assumes no liability for the information provided.
Products offered by iCapital Network are typically private placements that are sold only to qualified clients of iCapital Network through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.
Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. (d/b/a iCapital Network). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.
© 2021 Institutional Capital Network, Inc. All Rights Reserved.