This publication recently spoke to Bernstein Private Wealth Management and its chief investment officer about how it approaches asset allocation, risk and liquidity management for clients in what have been volatile times.
When US interest rates were raised after the pandemic to
choke off higher inflation, tightening monetary policy after more
than a decade of ultra-low rates hit certain sectors with a
jolt.
But, as is usually the way with investing, opportunities opened
up as valuations in certain areas, such as US commercial real
estate, were affected by the hikes. At Bernstein
Private Wealth Management, the change presented a chance to
enter the market.
“US commercial real estate is high on our list. The disruption
that has occurred as a direct result of the rate spike, made
worse by the short-lived but longer-healing regional bank crisis,
has reset values across all property types by 30 per cent to 40
per cent, in our opinion,” Alex Chaloff, chief investment officer
of Bernstein Private Wealth Management, told this news
service.
“We think the real estate sector’s fundamental story is finally
approaching an inflection point. We are investing in long-dated,
private-equity-like structures that are more
opportunistic/value-add, strategies that seek to provide current
yield by investing in stabilized assets that have been hit by the
lack of financing more than any stress and, finally,
stepping into the void of that financing by providing real estate
operators with debt when there is a lack of such lending,”
Chaloff said.
This news service has been talking to wealth and asset managers
about their approach to asset allocation and location in light of
changing monetary policy and possible moves to tax (see an
analysis
here). After ending about 12 years’ of quantitative easing
and ultra-low rates, central banks raised rates sharply, although
they’ve started to cut them in recent weeks. The US Federal
Reserve cut
rates by 50 basis points last week.
Bernstein’s Chaloff said that when it comes to thinking about the
big picture of asset allocation, the firm tends to be “much more
focused on the long term than on the next six to 12 months.”
“For the liquid portion of client portfolios, we’re focused on
ensuring our current exposures are at or near long-term strategic
allocation targets. For clients who have built up cash in the
elevated interest rate environment, high-quality bonds are a good
first step off the sidelines,” Chaloff said. “As inflation has
fallen closer to target, bonds have started performing their
intended role in a portfolio, and enjoy higher yields than we
have seen in more than a decade. Though we have already seen some
of the benefit from Fed rate cuts, but investors can still
participate in the cycle. We expect equities to be supported by
earnings” growth in the next year. We also see pockets of
attractive valuation left by extreme market concentration in the
last year-plus. To be sure, some clients perceive risks to be
elevated, and we are responding by adding risk management
strategies that can reduce volatility, but also allow for upside
participation.”
Risk management
Chaloff said Bernstein has enhanced its risk management
capabilities in public markets, because most of its clients have
a liquid component on their balance sheet.
“We have launched new ideas in the buffered ETF space to provide
our investors with the measure of safety they prefer without
cutting them out of potential gains in the equity markets,” he
said. “And we have enhanced other risk management strategies to
keep up with the changing times and elevated volatility levels.
We also emphasize diversification across asset classes, public
and private. And just like our investors own public equity and
public debt, they also own private equity and private debt. The
usage of private alternatives where possible and appropriate, can
be additive to return but also lower volatility.”
“There are some who say that the volatility reduction that comes
from infrequent valuations in private markets is artificial. Our
view is that the delay in pricing, the less frequent valuations,
and a lack of ability to take action during inopportune periods
all help to make the investment experience smoother and should
not be discounted,” Chaloff said.
Looking for alternatives
When it comes to investing in alternative areas – such as hedge
funds – while not jettisoning liquidity, Chaloff said Bernstein
favors diversified hedge funds.
“Hedged equity, for example, has been very strong in 2024 and we
have been rewarded by continuing to maintain a healthy exposure.
And, with more favorable liquidity, investors can rebalance in
consideration of long-only portfolios on a consistent basis,”
Chaloff said.
FWR asked Chaloff how Bernstein approaches
diversification and whether the old 60/40 equity/bond allocation
split is now dead or is there still traction in it?
“60/40 is relevant as a starting point for asset allocation
discussions. But it’s just that – a starting point. When we
constructed our alternative asset allocation modeling tool, we
used 60/40 to establish the base-case allocations. Today, our
client allocations generally contain 10 per cent to 30 per
cent alternative investments. 60/40 may represent the liquid
portfolio, but it’s a smaller portion of the investible balance
sheet,” Chaloff said.
“There is good news in 60/40 land in the current environment.
Bonds continue to be a large contributor to cash flow for our
investors. We care about whether they can (1) generate attractive
levels of income and (2) offset public equity market volatility.
With rates now back near multi-decade highs, we’re much more
positive on their income offering. And with the inflation genie
now appearing to be back in the bottle, we expect they’ll return
to being decent diversifiers during growth shocks that hurt
stocks. In summary, 60/40 is still important but it’s important
for a smaller piece of the pie,” he said.
The amount of exposure clients have to alternative investments
(hedge funds, private equity, etc) varies based on client
circumstances, and that is mostly driven by spending (the need
for liquidity) and risk tolerance.
“For clients who have a liquidity buffer and accept a lack of
control and a potential deep J-curve, we are active allocators to
alternative investments. We constructed a proprietary alternative
investment allocation tool that allows us to ensure that the
overall size and the mix of our alts makes sense for any given
client and compares the trade-offs of, say, liquidity, with that
of volatility and total returns,” Chaloff said. (The “J-curve”
point refers to how, in the early years of investing –
in say, private equity – there is a negative return as
money is put to work, before a positive return kicks in later.)
