Displaying items by tag: allocation

Middle-market collateralized loan obligations (CLOs) are gaining traction, driven by increased direct lending and investor interest, and are poised to surpass broadly syndicated CLOs. In 2023, middle-market CLO issuance reached $27.1 billion, capturing a record 23.4% of the US market.

A study by S&P Global Market Intelligence and Creditflux explores how CLO managers are adapting to this growth and managing risks, highlighting challenges like limited financial disclosures. 

S&P Global Ratings predicts that default rates on leveraged loans could rise from 1.9% in October 2023 to 3% by September 2024, underscoring the need for effective risk management. The research also examines how managers are incorporating ESG factors to meet regulatory and investor expectations.

Finsum: CLOs seem like a natural place for ESG factors to gain traction. 

Fidelity recently conducted a survey of advisors and found that only 26% currently have exposure to alternative investments. In contrast, 86% of institutional investors have exposure to the asset class. 

The survey also revealed that many advisors are looking for more resources to help them evaluate various alternative offerings before they feel comfortable recommending them to clients. This is despite other surveys showing that many advisors would like to increase allocation to alternatives due to their benefits such as diversification and non-correlated returns. 

Specifically, advisors cited the need for more due diligence on strategies and managers in addition to concerns about liquidity as obstacles to adoption. Many also indicated the difficulty of communicating with clients about these products given the number of options and complexities.

Adding to the challenge is that each clients’ appropriate exposure to alternatives depends on factors like time horizon, liquidity needs, and eligibility. This level of customization increases the burden on advisors to understand various options in a comprehensive manner. 

In order to address these problems, Fidelity is expanding research on various alternative investment strategies. Initially, the research will focus on private credit, private real assets, and private equity funds. According to the company, these types of tools and resources will accelerate adoption of alternatives by advisors. 

Finsum: A recent survey by Fidelity showed that many advisors have been slow to adopt alternatives. A primary reason is that advisors have a need for more due diligence on the various products and strategies before they feel comfortable recommending them to clients.

Alternative investing was ascendant following 2022 when both stocks and bonds were down double-digits. The asset class proved its worth as it delivered positive returns while reducing portfolio volatility. 

2023 has followed a different script as the S&P 500 finished the year at new all-time highs, gaining 24%. Bonds also finished the year with healthy gains while continuing to provide attractive levels of income for investors.

Yet, there are no indications that demand for alternative assets is eroding. In fact, many wealth managers are now recommending an allocation of between 15% and 25%. According to Paul Camhi, a senior financial advisor at The Wealth Alliance, “Even after a great 2023 for stocks and bonds, we still believe that owning alternative investments as part of a properly diversified portfolio makes sense. We include these strategies as part of our strategic, long-term allocation, not as tactical short-term investments.”

Additionally, a survey of advisors by iCapital revealed that 95% plan to increase or maintain current levels of exposure. The survey also showed that 60% of advisors expect alternatives to outperform public markets this year. Within alternatives, private credit has seen the largest share of inflows. Buffered ETFs are also increasingly popular, especially for retired investors as they provide protection during periods of elevated volatility while still providing upside exposure during bull markets. 

Finsum: Alternative investments continue to see healthy inflows despite the strong performance of equities and bonds. Many now see continued benefits as it provides differentiated returns and diversification to portfolios.

Last year, real estate transactions declined by 50%, while cap rates increased by 80 basis points. Many sellers were unwilling to let go of properties at lower prices, while buyers contended with a higher cost of capital and macroeconomic uncertainties. Another headwind was that many banks pulled back from lending due to balance sheet concerns, following the regional banking crisis.

This year, KKR is forecasting that real estate transactions will pick up, and there will be many opportunities for investors. Additionally, private real estate investors are well-positioned to step into the vacuum and provide financing for high-quality real estate at attractive terms. 

KKR notes some catalysts that should result in transaction volume increasing. The firm believes that real estate values are near a bottom especially as the Fed is at the end of its hiking cycle and looking to cut in the coming months. 

It also notes that REITs are a leading indicator for private real estate and have already embarked on a robust rally. Further, many real estate private equity funds have ample cash and have been on the sidelines for the last year and a half. Finally, many owners and operators will be forced to sell given that many loans are due to be refinanced in the coming years. In total, $1.6 trillion of real estate debt will be maturing in the next 3 years. 

Finsum: Over the last 18 months, activity in real estate has plummeted. KKR believes that we are close to a bottom. It sees attractive opportunities for private real estate investors especially given that many loans will need to be refinanced in the coming years in addition to an improvement in macroeconomic conditions.

2023 was a unique year as nearly every asset rallied due to positive news on inflation, an economy that remained resilient, and expectations that the Fed is ready to pivot on monetary policy. Looking ahead, 2024 is certainly going to be more challenging for equities and fixed income.

JPMorgan believes that investors should have exposure to private market as they offer steady returns and can increase diversification. The bank notes that private equity has outperformed public markets over multi-year periods regardless of economic conditions. The asset class has recently faced headwinds due to interest rates increasing the cost of capital. It recommends focusing on private equity funds that less leveraged and focused on higher-quality companies with durable growth characteristics.

While the monetary environment poses some challenges, it also creates opportunities for investors to lock in attractive yields in private credit. Commensurately, many banks have pulled back from lending, following the regional banking crisis, while public market debt issuance has also been constrained. Private credit has stepped into the vacuum to provide capital for these borrowers while also structuring loans to provide more protection in the event of a default. The bank notes attractive opportunities in commercial real estate, floating rate debt, and leveraged loans.

Finsum: JPMorgan anticipates more volatility and a more challenging environment in 2024 than last year. It sees upside in alternative investments to boost returns and diversification.