Evaluate alternative assets from a fresh perspective
Executive Summary
In investments, nobody wants stale numbers!
A technical research paper by Jaundre Scheltema and Guy Fletcher, Client Solutions & Research, Sanlam Investments.
Allocation to alternative asset classes such as private equity, infrastructure, real estate and unlisted credit seems to be gaining ever more traction globally. In the US, private assets have become the #1 asset class in recent times, with allocations increasing from about 4% to around 20% for institutional investors over a 20-year period (Willis Towers Watson, February 2018). Locally too, we’ve seen a similar trend amongst retirement funds.
Why all the hype? It would seem that alternatives have become an increasingly attractive asset class primarily for their potential for superior returns, access to a liquidity premium, and diversification benefits, all offsetting the relative complexities.
But all is not as simple as it would seem as regards the allocation to alternatives in the context of a balanced portfolio. If you want to build better portfolios, you need to go about it with scientific rigour and an explicit (robust) process.
In this article we show you how to achieve a better informed, more realistic picture than you would ordinarily achieve through simply including alternative assets at face value. We do this specifically by adjusting for stale and infrequent pricing to reveal the unobserved volatilities and relationships, adjusting the estimations and, in so doing, building smarter portfolios.
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