A survey of the nation's top RIA's with assets under management of $500 million or more by alternative investment solutions provider PPB Capital Partners found that holdings of alternative investments in client portfolios are likely to increase over the next 12 months. The firm conducted the survey to gain clarity on the direction of alternatives among RIAs, and to provide insights to RIAs for whom alternative investments are an emerging part of their business.
On The Rise
Among survey respondents, 45 percent said they expect the alternative investment asset allocation in clients' portfolios to increase, and 47 percent said they expect the allocation to stay the same, with just 7 percent reporting alternative assets in client portfolios would decrease.
"These are significant numbers," said PPB founder Brendan Lake. "That 45 percent of clients have an appetite to place more of their assets in alternative investments, is notable. But with another 47 percent expecting the allocation to remain the same — not decrease — means that 92 percent of clients remain comfortable with their alternative assets allocations. This despite limited liquidity in many cases and a surging stock market."
He added that investor satisfaction was also boosted by investment selections. Specifically, the top three investments; private equity, real estate and private credit at 37 percent, 22 percent and 22 percent respectively, have performed well. Lake noted that, "Private company valuations, which have a strong correlation to public company valuations, have, over the past year, risen in lock step with the stock market at large. And as a result, private equity allocations have done quite well."
Big Numbers
"The expected increases in alternative asset allocations appear to be material rather than incremental," said Lake. Specifically, 72.5 percent of respondents said they expected their alternative asset allocations to increase by up to 25 percent. Another 19.9 percent said they expect their allocations to increase by more than 50 percent. As for contraction, 17.6 percent of RIAs said they expect the percentage change in alternative investments in client portfolios to contract.
The growth in alternative assets will, to some degree, cannibalize other parts of the portfolio, according to respondents. Specifically, 50 percent of respondents said alternative asset allocations are deliberate rebalancing of traditional assets or liquidation of other assets in the portfolio.
"This also means," said Lake, "that half the time alternative allocations are funded with new AUM, and this is significant."
He noted that, "When we asked RIAs what their primary objective was in offering alternative investments, not even one selected the options 'To fulfill practice goals,' which demonstrates a strong commitment to fiduciary duty. Nonetheless, these figures demonstrate that alternative investments are one of the surest ways to increase AUM, which is in fact, and understandably, a goal for almost any RIA."
The Coming Correction
In a 10 percent correction, 41.7 percent of respondents said they would expect their alternative investments to be down, but not as much as the market at large. Another 40 percent of respondents said their allocations would be neutral with a flexion of just 1 percent to 2 percent. Finally, 18.3 percent thought their alternative allocation would be positive.
