J.P. Morgan Asset Management’s new Global Alternatives Outlook report, released Wednesday, assesses opportunities in alternatives as investors look to construct robust portfolios in an environment of high public equity valuations and lower fixed income yields.
“In this delicately balanced investment climate, investors should increasingly consider the role alternatives can play as both a diversifier and a potential source of steady income without adding to a portfolio’s equity risk,” Anton Pil, global head of alternatives at J.P. Morgan Asset Management, said in a statement.
The report categorizes asset classes according to their role in the portfolio, divided into three basic components:
- Core foundation: assets such as core real assets and core private credit to provide stable income with lower volatility
- Core complements: assets such as hedge funds to add diversification and uncorrelated alpha
- Potential return enhancers: assets such as special situations and private equity to seek opportunistic return
According to the report, spending on tech continues across industries, increasing opportunities as digital initiatives go mainstream, such as the buildout of public 5G networks. This will likely fuel capital expenditure and increase demand for software and services. Increased application of machine learning will continue to have a positive effect many industries, including finance and hedge funds.
In 2020, it will be essential for hedge fund managers to increase integration of environmental, social and governance criteria and sustainability across their businesses and investment activities, the report says. The next sectors to experience sustainability-led disruption include transport, agriculture, automotive, buildings and industrials. Investing in sustainability will be crowded, making manager selection crucial. Active investors will be able to take full advantage of the theme across industries, through long and short exposures in different asset classes.
J.P. Morgan asset managers say value, which has become very inexpensive, is one of their best bets as they expect a rebound to reverse a factor trend prevalent since early 2017. They see a bubble building among lower quality, higher growth names, so based on investors’ objectives and risk appetite, the opportunity could come from selective short exposure, rather than just being long the value factor.
The significant amount of capital raised for core infrastructure has come from a relatively low base, and private capital remains a small percentage of the market’s overall financing. The report says equity returns remain attractive relative to other traditional asset classes, particularly on a risk-adjusted basis.
But even as core infrastructure equity risk-adjusted returns remain attractive on a relative basis, some investors are increasing their risk tolerance in order to maintain expected returns. J.P. Morgan says that based on their investment objectives, investors should focus on assets that can provide clear visibility into long-term yield.
A focus on environmental, social and governance considerations is fundamental and aligns closely with the objectives of infrastructure investments, the report says. Renewable energy’s environmental benefits are lifting both supply and demand in the sector, resulting in the availability of long-term contracts aligned with the investment objectives of the asset class.
In the current low-yield environment, the report says the core-plus transport sector is an attractive proposition for investors looking for assets classes with potential for reliable income streams resulting from long-term leases, low leverage and the financial strength of high-quality, often investment-grade, end users.
The report notes that despite declines in China-U.S. trade volumes, trade tensions have hurt seaborne trade less severely than many had expected as substitutions in the supply chain have mitigated their effect.