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Alternative Investments for Wealth Management Portfolios

Many investors are now willing to sacrifice liquidity in the search for higher yields, more attractive risk-adjusted returns and the flexibility to hedge against downside risk.

High net worth and mass-affluent investors are increasingly allocating to alternative investment strategies in order to enhance returns, manage risk and diversify portfolios. We see several factors driving this trend across wealth management portfolios, including the desire for alternative sources of return at this late stage in the economic cycle and the expectation that future returns are likely to be lower across traditional asset classes.

Two additional, yet critical, developments are also driving the interest in alternatives: technological innovations that are increasing investor access to alternative investment strategies and greater sponsorship by asset managers of less liquid, registered investment companies (RICs).

Technological innovations

A host of financial technology (fintech) platforms have evolved in recent years that greatly reduce the operational challenges and the minimum investment amounts historically associated with alternative strategies housed in private vehicles. These platforms have greatly streamlined the subscription process, mainly through less onerous, paperless documentation and electronic signatures, and helped drive down minimum initial investment requirements to levels that cater to a wider array of individual investors.

Fintech platforms have also made it easier for certain qualified investors to access alternative investment strategies in private vehicles. PIMCO has recently formed a partnership with fintech firm Artivest to deliver technology and feeder fund solutions to wealth management advisors.

Greater sponsorship of less liquid RICs

Investors who may not be eligible to invest in private funds have historically had limited access to alternative investment strategies. This is now changing for two main reasons. First, investment managers are sponsoring more registered closed-end investment companies, such as interval funds or tender offer funds, which can hold a greater amount of illiquid investments than open-end mutual funds. In addition, mass-affluent investors are showing greater willingness to sacrifice liquidity in exchange for higher return potential.

While these types of RICs do not offer the same degree of investment freedom as many private placement vehicles, we believe they can dramatically expand the investment opportunity set into less liquid markets and address many key operational hurdles for wealth management investors – by offering generally lower minimum initial investments than private funds, 1099 tax treatment and a purchase experience that can be similar to that of a mutual fund.1

Why are these developments important?

Wealth management investors today face significant investment challenges posed by historically low interest rates and high valuations in equities and other publicly traded risk assets. We believe alternative strategies offered through fintech platforms or RICs can help wealth management clients meet multiple investment needs.

  1. Elevated income potential – Given current low interest rates and credit yield spreads, certain alternative investment strategies have the potential to help enhance income in wealth management portfolios beyond what traditional beta sources typically generate.
  2. Lower correlations – Greater ability to implement hedges and focus on less trafficked, more complex markets can provide investors with potentially attractive risk-adjusted returns and relatively low correlations to traditional stock and bond markets.
  3. Greater downside risk management – Certain alternative strategies have the flexibility to implement market-neutral or short positions across many financial markets, providing the potential for explicit downside protection.
  4. Expanded opportunity set – Alternative investment strategies can allocate across both public and private markets, providing exposure to a wide variety of asset classes that are not accessed to a significant extent via more traditional vehicles.
  5. Better liquidity matching – Even as investors have moved out on the risk spectrum in recent years to generate returns, many wealth management investors have kept nearly all of their investments in daily or intra-day liquid vehicles. At PIMCO, we believe many wealth management portfolios are now invested in far more liquid vehicles and assets than investors’ needs dictate. By providing exposure to an expanded investment opportunity set, RICs with alternative investment strategies can offer investors the opportunity to put some of this excess liquidity to work.

Bottom line

We have seen a significant change in the mindset of wealth management investors: Many are showing a greater willingness to sacrifice liquidity in the search for potentially higher current yields, more attractive risk-adjusted returns and flexibility to protect against the downside. PIMCO is finding attractive opportunities in complex and less liquid credit markets, as many wealth management investors are seeking access to alternative strategies either as de-risking tools for equity exposure or yield- (and sometimes risk-) enhancement tools relative to traditional credit allocations.

We believe that the combination of investors’ long-term return needs, the current backdrop in financial markets, and technological and product innovation will be powerful forces shaping alternative allocations across wealth management portfolios over the coming years. At PIMCO, we are excited to be delivering strategies that combine our portfolio management expertise in alternative investments with the financial technology of Artivest in highly user-friendly formats.2

To learn more, please contact your account manager.

1 Interval funds may offer daily subscriptions similar to a mutual fund. However, it is important to note that an investment in an interval fund [and tender offer funds] should be considered an illiquid investment, given these funds’ limited liquidity (e.g., periodic repurchases of a targeted percentage of an interval fund’s outstanding shares, and periodic tender offers in the case of tender offer funds).
2 Artivest and PIMCO are not affiliated.
The Author

Barbara Clancy

Head of PIMCO Latin America and the Caribbean

Jason Mandinach

Head of Alternative Credit and Private Strategies

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Alternatives strategies involve a high degree of risk and prospective investors are advised that these strategies are suitable only for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment. The strategies may be leveraged and may engage in speculative investment practices that may increase the risk of investment loss. An alternative strategy’s fees and expenses may offset its trading profits. A substantial portion of the trades executed for certain strategies may be in non-U.S. securities and take place on non-U.S. exchanges. Certain strategies may invest in non-publicly traded securities which may be subject to illiquidity risk.

There is no secondary market for private fund and unlisted closed-end “interval” fund shares, and none is expected to develop. There is no guarantee that an investor will be able to redeem or tender all or any of their shares in a periodic repurchase or tender offer. Performance could be volatile; an investor could lose all or a substantial amount of their investment.

Investing in debt or the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions Entering into short sales includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing a strategy. Investors should consult their investment professional prior to making an investment decision. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. Outlook and strategies are subject to change without notice. Strategy availability may be limited to certain investment vehicles; not all investment vehicles may be available to all investors. Please contact your PIMCO representative for more information.

This material contains the current opinions of the manager and such opinions are subject to change without notice. Statements contained in this material may constitute forward-looking statements. These statements may involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the performance of financial markets, the investment performance of PIMCO’s sponsored investment products, general economic conditions, competitive conditions and government regulations, including changes in tax laws. Further, such forward-looking statements speak only on the date at which such statements are made. PIMCO undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statement.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.