by Daniel Maccarrone, Head of Family Office Investments, Morgan Stanley Wealth Management
In an unpredictable market, the spotlight shines brightly on the need to find ways to build more efficient portfolios—and alternative investments are often front of mind for experienced investors.
While it is hardly a secret that alternative investments can act as a return enhancer and diversifier in portfolios, successful implementation of these strategies is often a big challenge given the complexities and disparity in managers within the asset class. With alternative investments comprising an asset base of $22 trillion and thousands of funds to choose from,1 complexity can run high—making subject matter expertise, portfolio analytics and access to top fund managers critical.
In an asset class where complexity can run high, working with a qualified partner can make all the difference.
Successful Implementation Takes Time
Public markets tend to be efficient, and while asset allocation is often cited as the primary determinant of portfolio outcomes, focusing on areas where investors can extract alpha or excess performance based on skill can naturally lead investors to spend more time evaluating alternative investments. This makes sense, considering that the illiquidity premium or excess return expected for locking up an investment in private equity can be 4-5% higher annually than public equity investments, and manager dispersion can be as high as 15-20% per year between top and bottom quartile fund managers.1 This would seem to be a fertile place for investors to spend additional time to generate potentially better portfolio outcomes.
When it comes to manager due diligence and fund selection, it is often a time-consuming process in the same way good hiring should be. Talent evaluation is critical to good hiring decisions, and it’s important to consider a large pool of available candidates before making an important hiring decision. Alternative investments are not homogenous and can often be more complex when comparing options. When you couple this challenge with the fact that many family offices and institutions have small investment teams, finding a partner in your journey that can help you evaluate the alternative investments landscape can enhance the ability to deliver better outcomes in the asset class.
For decades, large investors have looked to alternative asset classes to seek differentiated returns, protection against falling public markets and diversification to construct more efficient portfolios. While manager selection can make a big difference in investor outcomes, successful implementation of these strategies means investors also need to have a keen eye on portfolio construction, position sizing and cash flows of the investments to deliver an optimal experience. This requires the right analytical tools and forecasts to ensure portfolios are efficiently managed, with capital call and distributions being the norm across many private investments.
The utilization of cash flow forecasting tools to determine appropriate position or commitment sizing and the anticipated pacing of capital calls and distributions within various private investment strategies is critical to successful implementation. It is one thing to have data and reporting on private investments, but proper interpretation of that data on an ongoing basis is critical to decision making. Continuous monitoring and updates of these cash flow forecasts help inform the sizing and timing of future commitments to ensure strategic asset allocation targets can be achieved.
Partnering with Subject Matter Experts
Worldwide OCIO assets hit $2.4 trillion in 2022 and are projected to reach $3.9 trillion by 2027, compared to just $90 billion in 2007.2 These trends suggest institutions and family offices alike are looking for advisors and partners for professional guidance. An outsourced advisor can not only offer support with asset allocation and manager selection, but also operational and administrative services, estate planning and philanthropy. For families specifically, the time and cost associated with hiring a large investment and back-office team to support these functions can be burdensome.
Having a partner to help vet opportunities and managers and sit alongside an existing family’s investment committee can help them more smoothly navigate the large and ever-changing alternatives landscape. Many professionals can plug seamlessly into the existing composition of a family office or work with existing investment committees.
Whether you are new to alternatives or are well-versed, collaborating with experienced professionals can help open the door to access, expertise, and analytics which are essential to the successful implementation of alternative investments. While the shifting alternatives landscape certainly keeps investors of all stripes on their toes, it also offers a compelling stream of opportunities that may be worth exploring with the right partner.
