Illiquid alternatives can be a boon for better outcomes in defined contribution, says AB's Karen Watkin.
Trump’s win is the latest in a series of extreme upsets to have rattled financial markets over the past year or so. In each case, shockwaves have quickly engulfed lots of different assets across many different geographies.
Some particularly attractive investment opportunities can be seen in illiquid alternatives including private equity, direct property and infrastructure debt
In today’s ‘risk on/risk off’ world, swings in investor risk appetite can be pervasive — and return patterns extreme. But this is not the only problem.
Squeeze out returns for acceptable risk levels
The prospect of long-term lower growth rates across the world poses significant challenges to future investment returns, even when investor risk appetite is relatively robust. And ultra-low interest rates have made it much harder to earn returns from the ‘safest’ government bonds.
With these big challenges ahead on both the risk and the return front, the outlook for defined contribution savers looks far from rosy. How can investment managers squeeze better long-term returns out of pension assets — without also exposing savers to unacceptable levels of risk?
Even within the constraints imposed by charge caps, proactive approaches can deliver return outcomes considerably in excess of market norms, while also helping savers weather volatility spikes.
Reap the illiquidity premium
Some particularly attractive investment opportunities can be seen in alternative assets deemed illiquid because they are not traded on public markets. These include private equity, direct property and infrastructure debt.
Illiquid alternatives typically offer compelling long-term risk premiums to compensate investors for tying up their capital for lengthy periods.
They can be marginally more costly to access than traditional stocks and bonds. But, if used appropriately, they can secure better diversification, stronger investment returns and, therefore, potentially better member outcomes.
Karen Watkin is portfolio manager, multi-asset solutions at AB
