Private investments were just taking off 40 years ago. Now they are ubiquitous in allocator’s portfolios, with many eager to put even more capital to work. But today’s market conditions are now significantly different: yields are flat, inflation is on the rise, and geopolitical risk is back in the market.
The CAIA Association, a 20-year old professional body for alternative investments, isn’t leaving the future to chance. Instead, the organization is releasing a new guide, called the Portfolio for the Future, to capital allocation on Thursday.
“While we’ve had hiccups or mini-cycles over the past 40 years, we’ve largely had a tailwind in which the 60-40 portfolio performs well,” said John Bowman, executive vice president at CAIA, speaking from Los Angeles on Wednesday. In addition, Bowman argues that investors are returning to a “more normal environment.” In other words, allocators can’t expect their performance this year to match 2021’s record highs.
Marcus Frampton, chief investment officer of the Alaska Permanent Fund, agreed. “I think that all the markets have had a wind at their back going back to the early ’80s,” he said by phone. “We’re at this inflection point where it will start going into a different direction.”
With a brand new set of market dynamics, CAIA recognized that investors like Frampton might be disappointed by alternative investments if they used the same playbook.
“The good times rolled, and outsize returns (absolute and risk-adjusted) persisted, and still do to some extent, in the rarified air of the top decile of the respective alternative investment performance universes,” wrote Bill Kelly, president and CEO of CAIA, in the guide. “That party is not over but has gotten much more complicated. Efficiencies and scale are the hallmarks of beta, and the legendary Jack Bogle built an entire investment discipline around the concept of getting (and taking) what the broad market has to offer. Perhaps alpha is not truly dead within the alts space, but it has certainly moved to an altered state of a new reality.”
The guide highlights five features of effective investing, including diversification, with a heavy focus on private, illiquid assets. Investors also want managers who are actively engaged in socially-centered outcomes, rooted in a fiduciary mindset, and focused on generating what it calls operational alpha, according to CAIA.
For investors, the central question is how to find alpha in the future. It starts, according to CAIA, with diversification. While “owning the market portfolio” has long been a widely accepted strategy, CAIA suggests that diversification is more complicated for truly long-term investors.
“Long-term investors define diversification differently, looking across asset classes and paying close attention to the interactions of investments in different parts of the …….