Panel, Conference Presentation
Alternative Investing: Cure for Stock and Bond Blues?
Milken InstituteTom Petruno, Jonathan Grunzweig, Jodie Gunzberg, Jonathan Rotolo, Scott Sperling, Carrie Thome, John Rotolo, Jody Gunsberg
- Expectations for traditional equities and plain vanilla bonds remain poor for the next five to 10 years, with a concern that delayed market adjustments could result in a significant shock in a decade.
- Alternative investments are projected to see substantial retail growth, evidenced by a surge in Morningstar alternative asset mutual funds from 25 funds holding $6 billion in 2007 to 157 funds holding approximately $55 billion.
- The asset management industry aims to address a "broken" defined contribution system by developing alternative solutions for retail investors, though warnings exist regarding the risks of relying on conventional correlation assumptions and illiquid assets within daily liquidity products.
- Real Estate Investment Trusts (REITs) in indices and ETFs are anticipated to grow due to new industry codes limiting diversification, while light industrial real estate is viewed selectively bullish driven by next-day delivery demands.
- Commercial real estate investment is expected to benefit from a retreat by conventional lenders, creating opportunities for private managers to fill the void in U.S. and international markets targeting mid-teen returns.
- Private equity firms are predicted to sustain approximately 13% to 14% compound returns over 20 years, maintaining a 500 to 700 basis point outperformance relative to the S&P index, though they may shift from buyers to sellers to capitalize on strategic M&A trends.
- Structured credit, specifically CLO equity, is forecast to deliver attractive risk-adjusted returns within the fixed income sector, while private equity firms are enhancing proprietary deal flow and operating efficiency to justify double-digit multiples.
- Commodities are suggested as a potential strategic switch following eight years of equity outperformance, with a weak dollar identified as a powerful pricing catalyst despite current fundamental constraints.
- The commodity rally is viewed cautiously as potentially a bear market rally due to incomplete fundamentals, with oil prices not yet rebalanced and China having already filled strategic petroleum reserves.
- Opportunities in agriculture are expected to emerge in one to two years as farmer balance sheets face stress from low prices, with weather volatility in the sector creating short-term return opportunities.
- Style premium allocations in portfolio management are planned to double from approximately 4% to 8%, reflecting a shift toward factor investing despite its current status as the smallest portfolio component.
- Structural changes are required in the 401(k) industry to better accommodate alternative assets, addressing the generational mismatch between institutional and retail allocation capabilities.