J.P. Morgan Releases 2019 Guide to Alternatives
NEW YORK: J.P. Morgan Asset Management today announced the addition of a new publication to its Market Insights Program, the Guide to Alternatives.
The book delivers insight on macro topics such as fundraising and manager dispersion, while also diving into real estate, infrastructure & transport, private credit, private equity and hedge funds in detail.
With expected returns from traditional asset classes under pressure, investors have been forced to look elsewhere in an effort to reduce volatility and enhance returns. In response to this, we have developed the Guide to Alternatives to provide unbiased and objective insights on what has historically been a relatively opaque asset class, said David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. Volatility should rise as the business cycle matures, and investors will continue to embrace alternatives. However, access to information will be the key to making optimal investment decisions.
Historically, many investors have lacked any sort of structure when it comes to alternative asset allocation decisions. With markets decidedly late-cycle, having both a framework and process for evaluating and implementing alternative asset classes in portfolios will become increasingly important, said David Lebovitz, Global Market Strategist, J.P. Morgan Asset Management. This new resource should not only provide an access point for information on alternatives, but also foster discussion among both institutional investors and financial advisors on risks and opportunities in an increasingly challenging market environment.
Among the prominent themes in the 1Q19 Guide to Alternatives:
1. Striking the right alternative asset allocation balance
Investors have recognized that a sizable allocation to alternatives can give a needed boost to portfolios. Too often, however, investors assemble a collection of independently-chosen alternative assets, not giving enough thought to how these investments will work together in a portfolio.
We believe in looking at the alternatives portfolio holistically - having a carefully constructed framework for an alternatives portfolio is essential for success, said David Lebovitz, Global Market Strategist, J.P. Morgan Asset Management.
J.P Morgan Asset Management suggests that an alternative asset portfolio be comprised of three basic components:
Core foundations, with assets such as core real assets and core private credit providing the potential for stable income with lower volatility
Core complements, with assets such as hedge funds able to benefit from increased volatility
Return enhancers, with assets such as distressed credit and private equity seeking opportunistic returns.
Across alternative asset classes, investors can uncover a wide range of market opportunities and late-cycle risks, such as dry powder in private equity and the evolving structure of private credit markets.
2. ESG integration is now mainstream in infrastructure investing
Private infrastructure investing has reached a tipping point, as the integration of environmental, social and governance (ESG) standards has become mainstream.
Infrastructure investing has led other asset classes in mitigating climate change risks and bolstering resilience; this has been driven in part by the need to comply with environmental regulations - a fundamental threshold for achieving expected returns.
Some examples of where this has been witnessed across J.P Morgan's portfolios are water companies complying with water conservation goals, renewable energy providers documenting emissions avoided, and the adoption, testing and revision of disaster resilience plans.
J.P. Morgan Asset Management sees increased opportunity in the renewable energy space as generation capacity increases and the cost of producing solar and wind energy continues to decline.
3. Hedge funds can play a key role in volatile markets
Often times, conversations about late-cycle investing focus on ways of playing defense in choppy markets. However, hedge funds can allow investors to play offense also as higher volatility takes hold towards the end of the cycle.
That said, certain types of hedge fund strategies stand out. Long/short equity funds should benefit from higher short-term yields and greater price dispersion, while macro and quantitative strategies, which often times focus on uncovering short-term inefficiencies, should benefit from higher volatility. These qualities may prove advantageous in the coming year, as correlations continue to fall and price dispersion continues to rise.