Who better to speak about investing in alternatives and real assets than Anne Valentine Andrews, one of the executives in charge of committing billions of dollars to those classifications on behalf of BlackRock, one of the world’s largest asset managers?
What alts and real assets has your firm been recommending to clients?
We have been talking to clients about the acceleration of structural trends that we call the 3 Ds: decarbonization, digitalization and decentralization. Investing alongside these trends will allow investors to benefit more in the long run by allocating into the acceleration, while leaving room for some tactical optionality to take advantage of any market dislocation.
Real estate and infrastructure are best positioned to take advantage of that trend. In private real estate, we have conviction in logistics warehouses and apartments as we take advantage of the digitization and decentralization trends. Value-add real estate strategies [are] also proving to be a great tool for investors to position more tactically. In infrastructure, we continue to be bullish on renewable energy as the world heads toward decarbonization goals. Natural gas remains an important factor in the transition toward net zero, to help us solve intermittency issues.
Talk about the role of alternatives and real assets in your clients’ portfolios.
One of BlackRock’s strategies is to be a leading whole-portfolio adviser, and this includes combining traditional asset classes with alternatives to enhance portfolio metrics. Alternatives and real assets can help our clients to achieve their investment goals, whether it is diversification, return and income targets, or to manage volatility. Many sectors in real assets exhibit stable income, which is a highly desired feature in our low-yielding world. Real assets portfolios can be structured to be global, with various risk levels, by combining multiple strategies, providing clients with further diversification to take advantage of different market cycles and lower volatility. And we expect alts and real assets to hold bigger positions in client portfolios during the years to come. Every year BlackRock surveys our institutional clients on rebalancing their portfolios. In 2020, 81 percent of respondents intend to increase allocations to alternatives, 55 percent of respondents indicated they plan to increase allocations to real assets, 46 percent plan to increase allocations to private equity, and 18 percent plan to increase allocations to hedge funds.
What are your concentration limits?
Concentration limits can vary depending on the client, and as a result, portfolio construction should be tailored to the client’s needs and objectives. The BlackRock Investment Institute has done a lot of work on portfolio construction related to private markets: For clients where liquidity is more important, the recommendation is lower, from 2 percent to 10 percent; and for clients with fewer constraints, allocations are higher, from 10 percent to 40 percent.
We see a possibility of those limits changing in the future. Our recommendations for strategic allocations are updated according to capital markets assumptions generated by our BlackRock Investment Institute. Liquidity and risk tolerance may also evolve over time.
What liquid alternatives and real assets are commonly used for your clients?
The liquid portion of the market is certainly important for a diversified portfolio and for more tactical optionality. At BlackRock, we utilize real assets securities to enable clients to get both exposure to real assets sectors and liquidity.
Regarding illiquid alternatives, our private markets investments include direct equity real estate and infrastructure across core to value-add strategies; real estate and infrastructure debt; private equity, including secondaries; hedge funds; and private credit.
Family offices and advisers are often interested in real estate and infrastructure, in search of yield, total return, diversification and, increasingly, inflation protection. Our funds are attractive for family offices and other qualified purchasers.
What are you especially optimistic about over the next two to five years?
In real assets, we are focused on the structural trends that make up the 3 Ds mentioned previously. Digitalization has accelerated the utilization of data as the fourth utility, and we are seeing substantial infrastructure needed to be built in fiber, towers and data centers. Shifts in the decentralization of business models are giving way to the rise of ecommerce, driving increasing logistics investments and outsourcing of non-essential business lines, while decarbonization is resulting in historic changes and net-zero commitments from corporations and governments around the world. Sustainability and ESG are no longer nice to have, but essential in investing and portfolio management. In addition, inflationary pressures continue to build up, and real assets are typically viewed as good hedges, while providing income that makes it an attractive asset class.