Top advisors shifted tens of millions of dollars into private market alternative investments last year as the stock and bond markets collectively posted one of their worst performances since the 2008 financial crisis, according to a SHOOK Research study.
Top advisors surveyed by SHOOK Research said private equity, real estate and private credit were among the bright spots in 2022, a challenging year marked by soaring inflation and rising interest rates.
The second-annual study offers key insights into the strategies deployed by top-ranked advisors seeking to diversify client portfolios during a period of market turmoil. Last year, the traditional 60/40 portfolio of stocks and bonds closed down 16%, one of its worst years on record.
“Many advisors invested in real estate and other private assets to deliver income and long-term value not correlated to their stock and bond portfolio,” said R.J. Shook, president and founder of SHOOK Research.
Shook added: “These same advisors found alternatives outperformed in 2022, while the public markets largely fell apart.”
Thirty-four percent of advisors said greater diversification was the top reason for investing client funds in private market investments, followed by lower volatility (29%). One in five (21%) invested in alternatives with the expectation that these investments would outperform the market.
Sixty percent of the advisors said they had raised their 2022 allocations to alternatives. One-third of advisors said they held allocations stable while 6% lowered client allocations.
Among advisors who reported raising allocations, 40% had more than $1 billion under management, 27% reported $500 million to $1 billion and 31% had $100 million to $500 million.
The study found that allocations don’t typically top 20% of a client’s portfolio. Nearly three-fourths (71%) of the advisors surveyed said they were allocating between 6% and 20% of client assets to private market investments. The industry average is less than 5%.
Advisors said they were exhibiting caution given economic uncertainty about inflation, interest rates and the direction of the nation’s economy. About 20% of advisors said they were holding 11% to 20% of client funds in cash. Four percent of advisors said cash positions exceeded 20% of the assets under management.
“I am encouraging some of my clients to try to get up to six months to a year of living expenses in some sort of cash investment,” one advisor told SHOOK analysts conducting the telephone interviews.
Advisors managing money for high-net worth clients were evenly split on the issue of whether they are recommending higher allocations in 2023 through mid-year 2024. Forty-six percent said they recommended clients make a bigger bet on the private markets while 44% said they thought their clients should maintain current levels.
“What we heard consistently from these advisors is the era of low interest rates is over and all that easy credit is going away,” said Shook, whose analysts conducted the study.
Shook said active management of private investments is going to increase in importance. “Generating alpha will continue to rise in importance – especially if inflation remains high,” Shook added.
The SHOOK Research study surveyed 227 out of 5,224 ranked advisors from its database. The study included both a questionnaire and in-depth qualitative interviews. SHOOK analysts conducted the telephone interviews between January 3 and March 9. Advisors who said they had no experience with alternative investments were excluded from the sample.
The sample, conducted for Blackstone by SHOOK, is a convenience sample of one segment of the advisor community. The results offer insights into how top ranked advisors manage client funds but the findings are not generalizable to the overall U.S. advisor population. The U.S. Department of Labor lists 330,000 financial advisors (2021). Blackstone participated in the review and preparation of the final report which is available at SHOOKResearch.com.
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