Abrdn lays out case for diversifying into alts
Abrdn has heralded the benefits of diversifying into alternative assets such as private debt, rather than sticking to the traditional ‘60/40’ equity/bond portfolio.
Andrea Wehner, investment director – multi-asset investment solutions specialists at the asset management firm, noted that markets have been in a climate of falling interest rates and low inflation for most of the past decade.
She said that this environment has favoured the traditional ‘60/40’ (equity/bond) portfolio – an approach that typically relies on equities for growth and bonds for diversification during periods of market stress, or negative correlation between equities and bonds.
Read more: Abrdn sees alternative investment portfolio grow to £25.8bn in Q1
But this changed in 2022 when central banks raised rates to tackle inflation. Fears over slowing growth led to both equities and bonds falling, defying typical expectations of bonds helping to counter equity market volatility.
“Equity markets have moved on from the initial inflation and rates stress, partly driven by a handful of US technology companies and solid economic growth,” Wehner said in a blog post on Abrdn’s website.
“However, bonds have continued to face a challenging market backdrop. Rate-cut expectations have been pushed further into the future, with the last mile of bringing down inflation proving challenging. Despite this, the absolute strength in equities has led to a strong rebound in ‘60/40’ portfolios.”
Read more: Abrdn sees “robust” demand for private credit
Long-term equity valuations are “not particularly compelling” and bond yields may not help to offset weaker equity markets due to the higher rate environment, which Wehner says bolsters the case for further diversification.
“Understandably, investors are asking for better ways to construct resilient portfolios,” she said. “In doing so, they’re increasingly looking for more diversified sources of growth and income. Specifically, portfolios that might generate attractive long-term returns while providing resilience during periods of market or economic stress. In our view, multi-asset solutions that are diversified across a range of assets can help support the desire for more diversified and flexible portfolios.”
Alternative assets highlighted in an Abrdn infographic include private equity and private debt; infrastructure; litigation finance and loans.
Read more: Private credit set for largest target allocation growth among alternatives
“While we see selective opportunities in traditional asset classes, we remain cautious about relying on them alone to generate income and growth,” Wehner said.
“Instead, we see several long-term opportunities in a much broader range of asset classes with attractive risk and return characteristics across market environments.”
The article highlighted particular opportunities within infrastructure assets, as well as niche areas with often idiosyncratic return drivers. These can include debt that is backed by healthcare royalties or precious metals royalties, and litigation finance.
