An approach that goes beyond the 60/40
I've long believed in the enduring principles of diversification and while the traditional 60/40 portfolio of 60% public stocks and 40% public bonds was once a cornerstone of the Modern Portfolio Theory, today's complex markets demand a more strategic approach.
The landscape for sophisticated investors is changing and ultra-high-net-worth families, pensions, and endowments are increasingly allocating capital to alternative investments to improve their portfolio outcomes.
This is why MLD Wealth developed the Alterna Private Income Portfolio in partnership with Obsiido Alternative Investments, exclusively for our clients.
It provides seamless access to institutional-quality opportunities in private markets that have traditionally been inaccessible to individual investors with the core objective of generating attractive, long-term risk-adjusted returns with a strong focus on consistent income generation.
It's a comprehensive, turn-key solution that provides exposure to a diversified, global portfolio of private credit, real assets, private equity, and hedge funds.
The Role of Alternative Investments
The world of alternative investments is a vast, global market, and it's growing at an impressive rate, projected to reach $61 trillion by 2032 from $26 trillion today.
I believe these assets offer unique benefits that can significantly enhance a traditional portfolio and these are baked into Alterna.
- Private Credit: Serving as the anchor of the portfolio, private credit is the fastest-growing alternative asset class. It's valued for its ability to produce high, stable yields, particularly in a "higher-for-longer" interest rate environment. By focusing on senior secured, floating-rate loans, the portfolio aims to protect capital and provide stable income while also offering diversification relative to public fixed income.
- Real Assets: This category includes real estate and infrastructure, which provide stable returns, diversification, and a natural hedge against inflation. For example, the portfolio includes allocations to strategies focused on core real estate and infrastructure with inflation-linked revenues. * Private Equity: While traditionally known for growth, our private equity allocation is strategically focused on downside-protected direct investments and select funds. This aims to enhance the portfolio's total return and diversification, as private equity has a track record of outperforming public equity.
- Hedge Funds and Cash: These allocations provide an additional layer of liquidity and seek to earn risk-adjusted returns. The portfolio's hedge fund component consists of strategies that use tools like leverage and derivatives to achieve distinct outcomes.
Performance and Downside Protection
We've designed Alterna to demonstrate resilience in stressed markets and provide downside protection.
A review of historical performance, based on a hypothetical back-test, shows how a model portfolio compares to a traditional 60/40 investor portfolio.
The model portfolio has shown a narrower return dispersion, indicating a less volatile and more predictable return stream.
During down years for the 60/40 model, such as 2015, 2018, and 2022, the Alterna model has demonstrated significant relative outperformance. This is a key benefit, as alternatives have a proven track record of enhancing investor outcomes when held alongside public equity and fixed income.
The portfolio also provides a target net annual distribution of 6%. It's important to remember that this is a target and not guaranteed, but it highlights the portfolio’s income-generating focus. The target net total return is projected to be between 8-10% over a rolling 5-year period.
A Robust and Liquid Solution
For private market investments, liquidity is a significant consideration, so we've thoughtfully constructed this portfolio with multiple levers to address this.
The structure allows for quarterly redemptions, with a gating threshold of 5% of the Net Asset Value per quarter to mitigate gating risk, coupled with a strategic cash position and incoming subscriptions to satisfy liquidity requirements.
The portfolio's structure is also designed to streamline administrative and operational considerations for clients. It provides a single investment solution with one tax slip, making it easy for clients to get high-quality alternatives exposure.
I’m confident that Alterna offers a compelling way to improve portfolio outcomes, providing income, growth, and diversification benefits by leveraging the expertise of leading managers.
As global capital markets continue to evolve, I believe that embracing a modern, diversified approach that includes private markets is essential for long-term financial success.
