State Street Global Advisors (SSGA) has shared three tips for financial advisers when it comes to their portfolio construction for the year ahead.
The firm said “a high level of co-movement between stocks and bonds” was limiting the effects and durability of a traditional 60/40 portfolio. They could also come under pressure in the event of market volatility given how the equity market has become concentrated around a few mega-cap stocks.
With this in mind, the first step advisers should take is to balance beta risks and add strength from other asset classes as well as consider private markets for their diversification and alpha generation. This includes private credit, real estate and infrastructure.
“Private equity, private credit, real estate, and infrastructure infuse non-traditional elements to the traditional mix of assets. These asset classes may offer higher returns, lower volatility, and enhanced portfolio diversification potential. The investment opportunities in private markets are vast, interesting, and growing.”
In October, a global survey by Schroders revealed more than half (55 per cent) of financial advisers said they are already investing in private assets, and a further 19 per cent said they plan to do so in the next one or two years.
Meanwhile, real assets such as gold, commodities and natural resources can generate additional yield or act as a diversifier to bonds and equities.
“On the opportunistic front, a tactical asset allocation (TAA) strategy that tilts towards favoured asset classes to generate risk-managed benchmark-beating returns can diversify existing ‘betas’ in a portfolio.”
The firm said portfolio construction should consider:
- Using modifiers (such as derivative-based strategies, private credit, or infrastructure) for income.
- Seeking tactical or opportunistic unconstrainted strategies that can adapt rapidly to market conditions to target non-traditional premia/alpha opportunities.
- Diversifying via strategies with lesser correlations to traditional markets — i.e. more balance across differing environments and asset classes, such as gold, multi-asset real return, and commodities.
At the end of 2024, Money Management explored what advisers should consider in their due diligence when assessing a private markets fund for a client’s portfolio. While the asset class is gaining in popularity, they face risks around illiquidity and opaque nature versus listed investments.
Fred Pollock, chief investment officer at GCM Grosvenor, said: “When you find a private equity manager who’s good, what do they really have? They have domain expertise, so they know some area or niche better than others. They know all the management teams in that area, they know all the assets. They have a plan of action to take cash flows from an enterprise and increase those cash flows. It’s not about anything else – that’s how almost all the value is going to be produced,” Pollock observed.
In private equity, this means looking for business people who are able to increase the cash flows and value of a business over time. However, the expectations vary when it comes to private credit, he said.
“When you get to the credit space, it’s completely different. You’re expecting someone who knows the companies, but you’re not expecting them to alter its business profile; they’re not in control of that. But they know everything that can go wrong. They know all the different pieces, they know all the players really well, they know who they’re lending to,” Pollock explained.
