It’s been easy for advisers to be lazy – the time for alternatives is now

“It doesn’t matter what type of investor you are, it’s the same across the board. It comes down to what is your objective and the type of returns you’re trying to achieve”. These were the wise words of Felicity Walsh, Head of Sales at Franklin Templeton speaking on The Inside Network’s Practitioners Panel. The session opened the industry’s first, and only, investment conference dedicated solely to non-traditional assets.

The consensus among the panellists, which included leading financial adviser Charlie Viola of Pitcher Partners, James Edmonds CFA and Head of Private Wealth at platform provider Praemium, and Kerry Craig, Global Market Strategist at JP Morgan, was that alternatives were both central to solving the challenges facing the traditional 40/60 or balanced portfolio but also an ‘inherently personal’ decision for advisers and clients alike.

Providing an update on the state of the market, Craig highlighted that allocations to alternatives, including digital assets, had surged by 25 per cent in 2021, compared to just 8 per cent growth in public market equities. ‘Return enhancement and diversification’ were key drivers of this growth in allocations, but the biggest driver has been the search for income and the stability of said income.

This was a message echoed by Edmonds, with Praemium in the unique position of both undertaking due diligence on prospective alternative asset managers but also seeing where capital is actually flowing. Mortgage funds, private credit and mezzanine debt remained a key focus for platform flows which Edmonds put down to the fact that the majority of investors in Australia are retirees and clearly in decumulation mode.

Walsh brought a unique institutional level contrast to the session, with experience and her current role focused around building bespoke investment and alternative asset solutions for clients spanning the entire spectrum of options. Walsh highlighted the massive evolution in the sector, saying “what’s exciting for advisers, is a lot of hard work has already been done….. the heavy lifting and due diligence has been led by institutions, so we can piggyback on that work.”

Walsh was quick to highlight the fact that domestic and global institutions have been central to the evolution of alternative asset classes ranging from hedge funds to real assets and private equity styles. This included forcing them to bring more competitive fee offerings to market, adopt more ESG aware approaches and think differently about the structure that suits various types of investors. The result is what can only be described as a flood of options now available to advisers to invest in everything from venture capital to real infrastructure assets.

The biggest challenge, according to Viola has and will remain deal flow and due diligence. “The hurdles are deal flow and getting access to good deals. You need to have enough resources to have due diligence on the funds you select, so you don’t blow up clients” he explained.

Viola admitted to embracing alternative assets in a significant way for his high net worth client base and suggested there was too much focus on liquidity or illiquidity for that matter. Central to his approach is first understanding the client and their cash flow requirements and then secondly, ensuring you have ‘look through’ into liquidity events, particularly in private debt and similar deals.

In his view, it has been incredibly easy for a financial adviser to be lazy over the last 10 or even 20 years, with both fixed income and sharemarket returns ultimately combining to deliver strong and consistent returns. But the reversal of the bond yield tailwind stands out as the biggest challenge to portfolios in more than three decades. For Viola, it is all about filling the clients bank account with consistent income, from real assets, but also diversifying return and growth sources outside of more volatile equity markets.

It’s not often you hear fund managers compared to charities, but Viola did just that, in reference to the fact that every fund manager has a great story. With such great stories it is incredibly difficult to make a sound investment decision so advisers should either consider employing an asset consultant, or alternatively, focus their effort on areas where they have the capability to undertake sufficient due diligence.

The challenge for advisers, and platforms for that matter, with alternative assets has been the need for timely and accurate reporting. Edmunds highlights the importance of operational due diligence and knowing whether a selected fund manager can actually delivering the tax reporting and valuation information that the SMSF and tax system in Australia will require.

But ultimately, the biggest takeaway from the panel was the importance of education. Advisers, fund managers and all other financial professionals must seek to demystify the alternative asset sector if they hope for it to be embraced by the end client. 

The Inside Adviser