What You Need to Know
- We’re at a critical decision point in our portfolio construction adventure. To utilize alternatives, there are two paths.
- One path to choose is that alternatives that are considered return enhancers.
- Advisors also may choose to look at the hedged strategy space for the first time in years.
If you grew up in the 1980s or 1990s, you probably remember the Choose Your Own Adventure series, where, as the reader, you would step into the shoes of the main character.
Choose one path and you’d find yourself surrounded by carnivorous dinosaurs. Choose the other and you might be trapped aboard an alien spaceship.
In January, the annual inflation rate for the United States was the highest it has been since 1982. Because many of us in the industry were kids devouring Choose Your Own Adventure books during the last such environment, it’s a significant milestone: For the first time, we’ll have to manage assets in an environment that includes record inflation, high valuations and an inverting yield curve.
What does all this mean? That we’re at a critical decision point in our “portfolio construction” adventure. For advisors looking to utilize alternatives, there are two paths:
Choice #1: Incorporate alternatives that are considered return enhancers.
Those who choose this path want to outpace inflation by incorporating an option like private equity or real assets into their portfolios.
Real estate investment trusts (REITs) as an asset class has been a strong performer in 2021 and 2022 through April and rents can escalate quickly with multifamily investments. Thanks to its macro tail winds, infrastructure could improve revenue numbers faster than cap rate expansion, resulting in total returns that exceed inflation.
Private equity is also a good choice as it tends to outperform when public markets falter. According to iCapital, six months around an initial rate hike, stock returns are on average flat to slightly negative, and 12 months after the first hike only see modest gains of 3%-6%.