%20(1).png?width=600&height=338&name=menu_thumbnail%20(4)%20(1).png)
%201.svg){kind=small}
David Barnard discusses portfolio construction in todays economic environment
Key Takeaways
- David Barnard, former head of private wealth at Alliance Bernstein, discusses challenges and solutions for today's asset allocation
- With interest rates nearing zero today after a 40 year bull run, advisors will need to turn elsewhere to achieve the returns and income goals their clients have.
- Advisors will have to cast a broader net and think about bringing asset classes into the allocation that they might not have considered before. Private markets are a great place to start with that.
- Private markets are increasingly where a lot of investment is taking place (making public markets less attractive). Returns here tend to be high due to high value add from managers, access to companies at different life stages and long time horizons.
- Private markets tend to be owned in a concentrated way by long-term investors, which removes them from distractions in public markets and allows investors to work directly with management teams to create value.
Transcript
My name is David Barnard. I recently retired from Alliance Bernstein, where I was for nearly 25 years, the last eight of which were running the private wealth group there. Now I'm focused on spending my time between philanthropic work and advising new businesses at the intersection of technology and capital markets.
I think the biggest challenge for advisors today has got to be asset allocation is really a generational change afoot there. If you think about it, interest rates declining for really what's been the last 40 years have provided an enormous tailwind for relatively simple allocations into public equities in fixed income instruments.
If you look back at historical returns there, they've been good over that period of time for mid to upper single-digit returns with relatively low volatility. And that's allowed investors to double their money every ten years without taking a lot of risk and having daily liquidity. Unfortunately, with interest rates near zero levels today, that's no longer an option. Advisors are going to have to cast a broader net and think about bringing asset classes into the allocation that they might not have had to consider before.
Private markets are a great place to start with that. If you think about private markets, there's a broader opportunity set there. Most people don't realize. Actually, over the course of the last 20 years, the number of publicly traded stocks has been cut almost in half. In addition to more companies to choose from, because private companies are not covered by Wall Street analysts, there tends to be more unlocked value there, and the companies that end up in investment portfolios are generally going through some sort of strategic change.
And finally, private markets tend to be owned in a concentrated way by long-term investors. And so that removes a lot of the distractions that tend to exist in public markets and allow these like-minded folks to work directly with management team to effect these changes and ultimately create value. If you look at the early adopters of private market investments, endowments, foundations, and pension funds, for the most part, it's not surprising that they tend to have the longest-term time horizons. And in this case, they were early to recognize that long-term time horizon is an advantage or an asset on their behalf. And in doing so, were able to identify similarly long-term oriented investors and look in more idiosyncratic and unique places for investment opportunities to unlock value.
Advisors everywhere are, by necessity, rethinking the asset classes that they have at their disposal to achieve their client outcomes. Private markets will enter the mix there for sure, and they too will need to work with their clients to recognize that being a long-term investor is an advantage and that that long-term capital deserves to find a place where superior returns are available to them. And now, more than ever, that's really not just a luxury. That's a necessity.
Other options that advisors have available include alternatives both that are absolute return-oriented. Sometimes just generally known as hedge funds. And what hedge funds are oriented towards doing is hedging out risk and attempting to drive a consistent positive rate of return. And along those lines, asset classes like real estate and infrastructure can also solve for that same sort of consistent positive return outcome. So when you think about solving for that upper single-digit return in an overall balanced allocation, you're not going to get there with conventional stocks and bonds. You're going to need to bring private markets and other more idiosyncratic investment tools into the mix. And I think that is really a great place to start.
Important disclosures
Opto Investment Management, LLC (the “Firm”) is a wholly-owned subsidiary of Opto Investments, Inc. and is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. This website is operated and maintained by Opto Investments, Inc. Certain products described herein and institutional relationships may involve investment advisory services provided by the Firm. This website is presented for financial institutions and investment professionals only and is not intended for individual consumers or retail investors, unless specifically noted. Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by the Firm or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from external, linked or independent sources, is believed to be reliable, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. We disclaim any responsibility for information, services or products found on linked websites. Images and photographs are included for the sole purpose of visually enhancing the website. None of them show current or former clients and should not be construed as an endorsement or testimonial. All investing is subject to risk, including loss of principal. Historical performance is not a guarantee of future performance and clients may experience different results. This information contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of the depicted investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting operations that could cause actual results to differ materially from projected results. See related disclosures at https://www.optoinvest.com/disclaimers.
