Look beyond traditional investments by adding alternatives

Outlook 2023Look beyond traditional investments by adding alternatives

As investors are facing what many describe as the perfect storm of difficult market conditions – high inflation, increasing interest rates, market volatility, recession fears, a disrupted bond market, a simmering global pandemic, and geopolitical uncertainty – many financial advisors and their clients are considering opportunities for diversification and strategies that may preserve capital, reduce correlations, and help realize portfolio objectives.

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Hear about the recent evolution and democratization of alternative investments and why now may be a great time for advisors and their clients to think beyond the traditional 60/40 portfolio.

Benefits of adding alternatives

Many alternative investments benefit from low correlations to traditional equity and fixed income investments and can be utilized to increase portfolio diversification. Some strategies seek returns greater than those typically available in the public markets, others may seek to protect capital when the market is down, while others may seek attractive returns in all markets.

In addition to diversification, complementing traditional investments with a strategic allocation to alternative investments may improve the overall risk-return profile of a portfolio of public equities and fixed income.

Adding alternatives may improve a traditional portfolio’s risk-return profile

Adding alternatives may improve a traditional portfolio’s risk/return profile chart

Source: Macquarie, 2022. Chart is for illustrative purposes only.

Common alternative investments

Our approach during this period of market uncertainty highlights the need to explore opportunities that may complement public equity and fixed income portfolios.

Private equity

Actively managed funds that invest primarily in established private companies, with the goal of improving performance, or in young companies with potential for growth.

Hedge funds

Actively managed investment vehicles that seek attractive risk-adjusted returns in all market conditions and aim to preserve capital during periods of market stress.

Private credit

Privately negotiated debt by non-bank lenders typically utilized when companies need capital but cannot access public credit markets.

Infrastructure

Investments in physical assets including bridges, roads, highways, and energy.

Opportunistic real estate

Investments that seek to create value by acquiring and/or developing properties, enhancing and repositioning underperforming or flawed real estate assets.

Energy

Historically, investments in companies producing refined petroleum products, though increasingly, investors are pivoting from fossil fuel-based businesses to focus on clean energy and renewables.

Turning insights into action

Investment solutions to consider

Learn about our alternative investment capabilities

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The views expressed represent the investment team’s assessment as of December 2022 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Investing involves risk including the possible loss of principal.

Past performance does not guarantee future results.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

All charts are for illustrative purposes only. Charts have been prepared by Macquarie Asset Management unless otherwise noted.

The disruptions caused by natural disasters, pandemics, or similar events could prevent the Fund from executing advantageous investment decisions in a timely manner and could negatively impact the Fund’s ability to achieve its investment objective and the value of the Fund’s investments.

Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment in private market securities. Such securities may be available only to qualified, sophisticated investors, may have liquidity constraints, and may bear the risk of investment in private markets securities.

Private market investments may entail a high degree of risk and investment results may vary substantially on a monthly, quarterly or annual basis. Among many risk factors, some are particularly notable. These include, without limitation, the general economic environment, the health of the housing market, employment levels, the availability of financing, the quality of servicing the assets backing the securities, the seniority and credit enhancement levels for structured securities, government actions or initiatives, and the impact of legal and regulatory developments. Additionally, private markets strategies may represent speculative investments and an investor could lose all or a substantial portion of his/her investment.

Private Placements may be available only to qualified institutional buyers, and may have liquidity constraints, and may not be suitable for all investors. The possibility that securities cannot be readily sold within seven days at approximately the price at which a portfolio has valued them, which may prevent a strategy from disposing of securities at a time or price during periods of infrequent trading of such securities.

Investment strategies that hold securities issued by companies principally engaged in the infrastructure industry have greater exposure to the potential adverse economic, regulatory, political, and other changes affecting such entities.

Infrastructure companies are subject risks including increased costs associated with capital construction programs and environmental regulations, surplus capacity, increased competition, availability of fuel at reasonable prices, energy conservation policies, difficulty in raising capital, and increased susceptibility to terrorist acts or political actions.

Investing in the real estate industry includes risks such as declines in real estate value, lack of availability of mortgage funds, overbuilding, extended vacancies, increases in property taxes, changes in zoning laws, costs from cleanup of environmental problems, uninsured damages, variations in rents, and changes in interest rates.

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The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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