Alternative Investments: Investors Turn To Alternatives For ‘A.I.D.’ (JPMorgan Report)
That’s ‘Alpha – Income – Diversification.’
The events of 2021 forced us all to reconsider what the “essentials” in our lives are: Health professionals, our family, our health, home, friends, and a good internet connection. The third annual Global Alternatives Outlook by J.P. Morgan Asset Management recommends you add another item to that list of essentials – alternative investments.
The 12- to 18-month Outlook takes into account the views of CEOs, CIOs, and strategists of JPM’s $150 billion alternatives platform.
Alternatives – from optional to essential
“After the unprecedented events of 2020 and the ensuing economic recovery, jump-started by swift central bank action and fiscal stimulus, investors continue to hunt for yield to take advantage of underlying consumer strength and resilient fundamentals across global economies,” says Anton Pil, Head of Alternatives, J.P. Morgan Asset Management. “In this environment, alternatives, perhaps once considered optional in investors’ portfolios, have become essential.”
JPM expects that investors will look to alternatives as they shift from public to private markets in their search for alpha, yield, and diversification (AID). Their key hurdles: “Stretched valuations in traditional markets, limited correlation benefits between fixed income and equities, and persistently low bond yields with asymmetric risk.”
In fact, it is highly unusual that public markets are currently challenged by yields at all-time lows as well as stretched valuations, says the report.
“In this context, alternatives and active management stand out as the two sources of AID investors need to succeed, in both the near term and the long term.”
Alternatives investing is best done by categorizing asset classes inside a framework according to their contributions to the portfolio – a core foundation, core complements, and potential return enhancers.
Alternatives asset classes and key themes
- Hedge funds – Strong growth opportunities for growth in 2021; global megatrends will take center stage; SPACs to provide interesting opportunities; ESG investing will accelerate
- Infrastructure – A valuable diversifier and source of yield and income in 2021; accelerated transition to a low carbon economy and renewables;
- Transport – The critical need for capital and linkages to ESG performance; the continuing search for sustainable but scalable technology solutions regarding energy; the sector’s pivot towards sustainability goals could provide attractive, predictable, long-term returns
- Private Credit – Delayed defaults due to stimulus measures and emergency loans could provide years of opportunities for credit hedge fund and distressed and special situations; opportunities in assets and companies that would return to normal after the pandemic; asset-backed property lending at better spreads and terms compared to what prevailed before the pandemic
- Private Equity – attractive opportunities amongst companies in the revenue sizes of $ 10 million-$ 100 million; co-investments; identifying the winners that ride technology and innovation, for example, software-as-a-service and healthcare
- Real Estate – industrial/logistics sector is a prime beneficiary of disruptive megatrends; though retail is down, it’s not out, and diligent asset selection could prove rewarding; the office sector has more promise than most people think despite the disruption from COVID-19; residential demand will continue to be driven by population trends despite the virus.
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