Here Come the Alts

With love for the 60/40 portfolio fading, 50/30/20 looks to be the cool new kid on the block.

Illustration by RIA Intel

Illustration by RIA Intel

Investors in today’s volatile and uncertain economy can generally agree on one thing — it’s not a great time for a 60-40 portfolio.

“The 60/40 portfolio was created for diversification, and its efficacy depends on a negative correlation between stocks and bonds. We’re seeing a positive correlation today, with both stocks and bonds trending down. That creates challenges for investors to remain with the status quo,” says Gregg Sommer, partner and U.S. financial intermediaries leader at Mercer Investments.

As is always the case in the investment world, challenges also present opportunities. Sommer and his colleagues at Mercer see the current economic environment as a window that they can use to support the transition by their clients — wealth managers and advisors in particular — to alternative investments, despite what has been a historic reluctance to engage with alts due to a lack of access, knowledge, and a lack of transparency, all of which made it difficult to conduct proper due diligence.

That appears set to change, however, as retail investors lean into alternatives, according to a new independent survey of RIAs, financial advisors, alternative asset managers, and other industry professionals conducted by CAIS and Mercer.

Among respondents, 85% say that their clients are looking to invest in new products or structures within alts, with 49% saying that clients are looking for both. Aligned with those findings, 68% of respondents revealed that their firms are rolling out new products and structures to meet demand. Advisors who participated in the study say real assets, private credit, and private equity are most likely to withstand the challenges of the current economic environment.

This demand for alts could allow advisors — who have a relatively untapped pool of more than $40 trillion in client assets — to drive change. And the survey indicates that they will.

In fact, nearly nine out of 10 financial advisors (88%) intend to increase their allocations to alternative asset classes over the next two years. More than half of the financial advisors who participated in the study (52.6%) are considering raising their alternative asset allocations to over 15% in the next two years, while more than one-fifth (20.6%) estimate that their alternative asset allocations will exceed 25%.

“These findings would seem to confirm that the ‘Great Reallocation’ of capital into alternative strategies is well underway within the private wealth channel,” says Matt Brown, Founder and CEO of CAIS. “With financial advisors shifting away from the traditional 60/40 allocation toward a three-dimensional portfolio representing a 50/30/20 mix between stocks, bonds, and alts, alternative asset managers could be presented with one of the greatest business development opportunities our industry has seen.”

Sommer and Brown share a common goal at Mercer and CAIS of providing “responsible access with purpose.” Sommer characterizes “responsible access” as all the resources investors require to enter the alternatives market in the hopes of preserving capital and enhancing returns — from education and product due diligence to a seamless tech and user experience.

“It’s about the financial advisor having a great experience,” says Brown, “because when done responsibly, these investments will help end investors pay for their retirement and their children’s education.”

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