CONTRIBUTORS
Peter Blue, CFA, CAIA, FRM
Head of Alternative Solutions
Franklin Templeton Investment Solutions
Rich Nuzum, CFA
Head of OCIO
Franklin Templeton Investment Solutions
Preview
Alternative investments have the potential to improve portfolio outcomes but entail many additional considerations at every stage of the investment process. Franklin Templeton Investment Solutions introduces a thoughtful and flexible framework for investing in alternatives within traditional multi-asset portfolios.
A key message is that alternatives investing can be rewarding but requires a well-resourced and disciplined process to navigate the risks and other factors involved.
Alternatives is a broad-based and heterogenous categorization. In fact, the name “alternatives”—though commonly used—tells us almost nothing about what might be included, other than the fact that they are not traditional public-market stocks or bonds. There is no one-size-fits-all alternative and a clear classification system is required to fully detail the opportunity set. Alternatives are commonly defined by some combination of asset classes, structure, and liquidity profile.
For the purposes of this document, FTIS focuses on the largest and most common categories of alternatives within institutional portfolios (Exhibit 1). These asset classes can be further distinguished by region and their own sub-classifications (e.g., private equity middle vs. large buyout). Other types of alternatives, such as artwork, crypto currency, historical artifacts, and jewelry will not be covered within this framework.
Exhibit 1: Asset Class-Based Taxonomy for Alternatives Universe
Source: Franklin Templeton Investment Solutions.
Investing in alternatives can be resource intensive and requires discipline. When executed thoughtfully, however, the portfolio benefits are meaningful. Historically, many alternatives have been the domain of large investors as it is economical only at large asset sizes to maintain sufficient staffing or consultant relationships and to have access to high minimum strategies. Fortunately, the industry is evolving to make alternatives more accessible through innovative structures and technology platforms. For both experienced investors and those new to the space, we hope the views and framework presented here contribute to the likelihood of a successful alternatives allocation.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Equity securities are subject to price fluctuation and possible loss of principal.
Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments should be viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
WF: 11118961