- Global portfolio composition continues to shift with larger allocations to alternatives
- Many of these alternative investments have previously helped portfolio performance but are less liquid than traditional investments
- The hunt for yield in a low-rate environment has also encouraged riskier fixed income investments
- Increased alternative and lower quality fixed income exposure could result in a more volatile and less liquid portfolio overall.
The shift to risker and less liquid assets strengthens the case for an allocation to gold, given its unique combination as a highly liquid diversifier, that can reduce portfolio volatility.
Investors are shifting more assets to less liquid alternativess
Portfolio composition has changed in response to the low-rate environment. Investors have moved further out on the credit curve, building high yield exposure and long-term Treasury positions in their search for yield.1 And, although fixed income allocations remain significant, they are declining.
Data from Greenwich Coalition2 and Mercer3, as well as anecdotal evidence from one-on-one conversations with investors and global conferences, suggest that along with this reduction in fixed income, investments in alternatives and ‘other’ assets (such as real assets and infrastructure) have been growing. In fact, results from a recent market survey conducted in partnership with the Greenwich Coalition respondents noted they are targeting a third of their portfolio in alternatives and other assets over the coming three years (Chart 1). But a key characteristic of these investments that should be considered is liquidity, particularly as we enter a higher inflationary period.
Many of the alternative investments have helped portfolio performance historically, but they often offer a much lower liquidity profile. In combination with the shifts in fixed income positioning this increases portfolio volatility and duration risk, and decreases the liquidity profile of the overall portfolio.