Independent Thinking^®

Diversified Market Strategies and Illiquid Alternatives

Now may always be the hardest time to invest, but for many investors, this time seems particularly hard across the traditional asset classes.

Equity valuations are high, fixed income yields are low and, as discussed in this issue of Independent Thinking, the surge in global debt is suppressing growth. A fundamental approach and a healthy allocation to nontraditional assets allow us to stay fully invested with confidence, even in these circumstances.
 
The Evercore Wealth Management Diversified Market Strategies, or DMS, asset class is designed to provide stability to investor portfolios when stocks and bonds are struggling. Investments are liquid and generally uncorrelated with both stock and bond markets, but have volatility and return characteristics commensurate with a blended portfolio of stocks and bonds over the course of an investment cycle, typically five to seven years.
 
The inclusion of uncorrelated assets with an attractive return profile can help reduce volatility for a portfolio as a whole and, in turn, improve the risk-adjusted returns, or the measure of the portfolio return against the amount of risk taken to attain those returns. In other words, DMS exposure can help instill confidence in the broader asset allocation and encourage investors to hold onto more volatile investments, such as equities, during market downturns, sparing them from selling at the wrong time and permanently realizing portfolio losses.
 
At present, the DMS portfolio is focused on two areas: an absolute return strategy designed to generate a noncorrelated, risk-adjusted return using a basket of hedge fund strategies within a daily liquid mutual fund structure; and a market-neutral long/short equity mutual fund that mimics a very successful hedge fund strategy that has demonstrated low correlation to equity and bond markets and superior risk-adjusted returns since inception in 2009. We have a new offering in our illiquid alternative portfolio as well, in the form of a direct investment that provides a single point of access for eligible investors to gain exposure to a diverse set of illiquid investments from Blackstone, one of the pre-eminent global alternative asset managers. (See the Q&A with Douglas Ostrover on page 14.).
 
In addition to DMS, illiquid alternative assets are another way to provide diversity in a balanced portfolio, and we have been focused on adding to our investment recommendations in this space. Here, we seek higher returns than our typical growth assets, as we expect to earn a premium of about 5% over and above the relevant index for the illiquidity. These assets are often idiosyncratic in nature and will therefore exhibit lower correlation to the broader market than a typical growth-oriented asset.
 
We currently recommend that DMS and the illiquid alternatives allocation represent, respectively, 10% and 5% of clients’ balanced accounts. We expect these assets to provide ballast to the portfolio as a whole, if and when it’s needed.
 
Brian Pollak is a Partner and Portfolio Manager at Evercore Wealth Management. He can be contacted at [email protected].