Higher rates are a headwind for illiquid alternatives, says Pendal multi-asset portfolio manager Alan Polley.

According to Alan Polley, a portfolio manager at Pendal, it is time to consider moving from illiquid alternative investments to liquid alternatives. Polley believes that illiquid assets, which have been benefiting from a falling interest rate environment, are no longer supported by a tailwind, and the rising interest rates are creating headwinds for these assets.

Illiquid assets are private, or unlisted, assets such as property and infrastructure, and they tend to be sensitive to interest rates in terms of financing costs and discount rates applied to future earnings. Illiquid assets tend to promise a liquidity risk premium, but the question is when that risk will eventually be felt.

The economic environment for these assets has changed, and investors should be concerned about the true risk of illiquidity, especially if their situation unexpectedly changes. In addition, there is a high likelihood that all illiquid assets will experience a simultaneous impact, resulting in significantly risky outcomes.

Shifting to liquid alternative investments will be a theme for this year, says Polley. Investors should look for assets that offer true diversification benefits, other forms of returns besides traditional equities and bonds, and have long-term potential, such as sustainable investment companies and investments with inflation linkage.

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