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Insights Article | June 6, 2023

What Your Portfolio May Be Missing


What Your Portfolio May Be Missing

One of the golden rules of investing is to follow the philosophies of the most respected investors and mirror similar investment strategies for your own portfolio.

The Modern Portfolio Shift

Over the last 20 years, there’s been a shift in asset allocation strategies to include alternative investments, and consequently, a noticeable gap of opportunity for those who have yet to adopt the modern portfolio infrastructure. For many investors, the world of alternatives is uncharted territory. Meanwhile, some of the smartest investors and largest institutions consistently invest in alternative assets where there are opportunities for higher risk-adjusted returns and reduced volatility from traditional markets.

Yale Sets the Standard

Take for example one of the most respected endowment funds—Yale University. As one of the largest funds around the world, it sets the standard for endowment performance. For over 20 years, it’s consistently outperformed its benchmarks and operating expenses by devoting a healthy dose of its portfolio to alternative investments.

“Over the 20 years ending June 30, 2021, Yale’s endowment returned 11.3% per annum, exceeding broad market results for domestic stocks, which returned 9.1%, and for domestic bonds, which returned 4.6%. The average 20-year return for college and university endowments was an estimated 7.7%.”

While not everyone can build a portfolio as robust as Yale, individual investors can undoubtedly take a page out of their playbook and emulate the diversifying power of alternative investments.

The Growth of Alternatives

Alternative investments are a staple in university endowments, public pension funds, sovereign wealth funds, and family offices around the globe. A recent Global Pension Assets Study showed that allocations to alternative investments have grown from about 7% to above 26% in a 20-year period and investment in private assets such as real estate, private equity, and infrastructure have become an attractive investment vehicle due to the downturn of equities from 60% to 43%, while bond allocations also made a slight dip from 31% to 29%.

As seen in the chart below, institutional investors have a steady position in alternatives, ranging from conservative to highly vested.

Picture1 What Your Portfolio May Be Missing

Historically speaking, alternative investments have been regarded as exclusive, too risky for a conservative investor, and reserved for the ultra-high-net-worth individual or the savvy institutional investor. In addition, it wasn’t until August 2020 that the US Securities & Exchange Commission broadened its definition of “accredited investor” to allow more investors to contribute to private market opportunities. Because of the lack of accessibility and misconceptions surrounding alternative investments, a large gap has been created between how institutions and individuals invest.

Prequin reports that the rate of retail investors searching for alternatives to enhance diversification from traditional markets will emerge as a driving force for change over the next few years. “The SEC expects the total pool of individual investable assets to rise from $70tn in 2018 to $106tn in 2025, while average allocations for individual investors are less than 5%, compared to 27% for pension funds and 29% for endowments.”

So, where are all the individual investors?

A Pivotal Moment for Individual Investors and Investment Advisors

This unbalanced infusion of institutional capital into alternatives is a bellwether for individual investors. It’s a sign to pivot away from outdated portfolio allocation strategies and allocate a percentage of portfolio investments into alternatives to stave off the unpredictability of the stock and bond markets as inflation, rising interest rates, geopolitical unrest, supply chain breakdowns, and COVID concerns persist. Simply put, weaving in another investment source can make a big difference for growth in good markets and resilience in volatile ones.

With less constraints to enter into alternatives, investors can seek out a more well-rounded portfolio blueprint to invest in private assets outside of traditional stocks and bonds and improve returns with reduced risk.

How Investors and Advisors are Improving Portfolio Returns by Incorporating Alternative Investments

By following in the footsteps of institutions and savvy investors, individuals have the ability to increase their risk-adjusted returns, diversification, and income generation through private alternative investment sources and holistic portfolio planning. For individual portfolios, allocating 15%-20% to alternatives is recommended because it allows a portion of the portfolio to be protected during different phases of the market cycle, reducing the ebbs and flows of stocks and bonds.

What was once considered a risky investment choice has not only become a more revered, balanced investment approach but is now seen as the desirable strategy for some of the smartest investors.

Wilshire Finance Partners’ private real estate investment strategies provide clients with an alternative source of yield and accessibility to short-term fixed-income alternative real estate investments in first trust deeds and mortgages secured by seniors housing, healthcare real estate, multifamily, and commercial real estate. With no correlation to the stock or bond markets and little to no sensitivity to interest rates, the target annualized return for the Income Fund is 5.5% to 8%.

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Don Pelgrim

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