Why Alternatives Should Be Part of Every Portfolio

Alternative investments are finding favor among high net worth investors who are seeking better returns and new ways to diversify their portfolios.

“People stick with stocks and bonds because that’s what they see every night on the evening news,” says Donald Calcagni, chief investment officer at Mercer Advisers, a registered investment adviser based in Santa Barbara, Calif. “They haven’t been introduced to anything else. But for investors seeking better returns, there’s no way to outperform the stock market by investing only in the stock market. It’s brutally efficient.” Calcagni says even registered investment advisers get wrapped up in predicting stock swings rather than focusing on expanding the asset classes included in their portfolios.

“It’s a breach of fiduciary duty not to consider other asset classes,” he says. “As a profession, we need to stop looking at the investable world as if it included only stocks and bonds.”

Those investors who do hold assets beyond stocks and bonds allocate 22 percent of their portfolios to non-traditional assets, according to a survey by New York Life’s MainStay Investments unit. Institutional investors are still currently the main backers of alternative investments in private real estate. They’re following the example of Yale University, which has grown its endowment from $4 billion to $25.4 billion in 20 years. Managers of higher-education endowments now allocate a majority of their assets to alternative investments, according to the National Association of College and University Business Officers.

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Origin Investments’ Fund I generated an average annual return of 27.2% from the Fund’s inception in 2011 through full year 2016, as compared to the S&P 500, which generated 12.6%.

Investment managers are sold on real estate because prices don’t follow — they’re not correlated to — the cycles of stocks and bonds. Returns are higher compared to other alternatives with the same expected risk. Rents and property values tend to keep pace with inflation.

“There are asset classes out there that have the potential to provide clients better returns and lower risk” than stocks and bonds, Calcagni says.

What keeps individuals from buying real estate to diversify their portfolios is the cost of entry: “The minimums to get into a quality fund are often too high for most investors — usually $250,000 per fund,” Calcagni says.

In contrast, Origin Investments’ third fund allows entrants who invest as little as $100,000.

A mix of stocks, bonds and private real estate investment shows a higher risk-adjusted return and lower volatility than other portfolios, according to Kevin McCarthy, president of PNC Realty Investors. In his experience, private real estate in a portfolio also yields a better risk-adjusted return than more volatile real estate investment trusts.

“When combined with stocks and bonds in a diversified portfolio, real estate provides the potential for superior risk-adjusted returns,” Calcagni says. “I would also advise investors to work with a fee-only investment adviser to properly determine the optimal amount of real estate to own given their unique risk tolerance, tax situation, and liquidity needs.”

For more information on Mercer Advisors, please contact Don Calcagni at Donald.Calcagni@MercerAdvisors.com.