Private equity and real estate tend to have lower correlation with the traditional markets and can help diversify a plan, Wylie Tollette, vice president of investment risk and performance at Franklin Templeton Group, told PLANADVISER. A fiduciary’s job is to generate efficient risk and return, he said, and “private equity and real estate can have those characteristics when included as components of an overall asset allocation.”
But alternatives do not come without challenges, he added. Real estate has less-frequent valuation (e.g. appraisals), and some of the alternative asset classes such as real estate, private equity and hedge funds tend to be “quite illiquid,” Tollette said. “These asset classes also have limited market data available, making ‘top down’ risk and portfolio analysis using standard risk systems somewhat challenging. “
Franklin Templeton developed a Complex Securities Review Committee, involving almost all key portfolio support teams, to ensure it tackles the data, pricing and other issues before introducing alternatives into portfolios, Tollette said.
These alternatives can still reduce the risk of a plan, but plan sponsors should be aware of their illiquidity and other challenges when making allocation decision, he said.
According to a recent study by Natixis Global Asset Management (NGAM), three in four U.S. institutional investors (74%) have changed their approach to risk management over the past five years. (See “Institutional Investors Say Alternatives are Essential.”) The majority (88%) of the respondents who invest in alternative products such as hedge funds, private equity and alternative mutual funds are pleased with the performance of their investments. When asked what they would do if they had to make the choice again, 93% say they would increase their allocation to alternatives or invest the same amount, and just 7% claim they would decrease their allocation.