Investing in alternative assets: Resetting asset allocations in a post-COVID world

In compiling a robust, and well-diversified investment portfolio, the inclusion of alternative assets cannot be dismissed. With the overarching aim of achieving capital preservation at the minimum, and progressing towards preferred returns on capital and optimal capital appreciation, diversification beyond traditional asset classes becomes imperative.

Incorporating non-traditional assets into your investment strategy can effectively align with these key objectives, offering avenues for enhanced risk management and potential growth opportunities.

From 2008 to 2020, investors traditionally balanced the higher returns and volatility associated with equities by allocating portions of their portfolios to “safer” assets like cash and bonds, aiming for stability. However, in the time since the onset of the pandemic, the landscape has shifted significantly. The fixed income sector has experienced substantial swings, characterised by elevated yields, price fluctuations, and ongoing speculation surrounding interest rates. Concurrently, equity markets have witnessed unprecedented volatility as they grapple with the task of pricing in increasingly complex and uncertain conditions. This volatility challenges the hallmark portfolio structure of passive investors, who historically relied on government bonds as a hedge against the fluctuations of riskier assets such as equities.

The positive correlation between stock and bond yields, which persisted for an extended period, has seen a recent shift. The correlation switch between equity and bond returns has been influenced by the recent surge in bond yields, driven by the upward pressure on the term premium. As a result, investors face a re-evaluation of traditional portfolio strategies and asset allocation in light of evolving market dynamics.

Private credit to defend portfolio returns

In times of market uncertainty, many investors opt to bolster their portfolio allocations toward defensive investments like fixed income as a strategic approach to preserving capital and generating income. Within this context, the attractiveness of private credit investments is on the rise. Offering stable, risk-adjusted returns through debt security (often a first registered mortgage over real estate property), private credit presents an appealing asset class for investors seeking to navigate volatile market conditions while still pursuing income generation.

Capital preservation

In times of market volatility and economic uncertainty, investors prioritise capital preservation as a paramount objective. One avenue increasingly favoured for achieving this goal is through investments secured by first-ranking mortgages over real property.

This strategy offers a layer of protection, as it ensures that in the event of default, investors have recourse to the underlying tangible assets. Investments secured by first-ranking mortgages often adhere to conservative loan-to-value ratios, providing an additional cushion against potential downturns in property values.

This conservative approach mitigates risk and enhances the likelihood of preserving capital, making such investments an attractive proposition for risk-averse investors seeking stability and security in their portfolios.

Portfolio diversification benefits

Private credit investments are often included in a well-rounded portfolio as a defensive layer to moderate exposure to volatility. Private credit – commercial real estate debt (CRED) in particular – have low, or negative correlated returns compared with direct real estate and equities markets. Additionally, these investments prove to be income-generating assets, demonstrating resilience during economic downturns and serving as a hedge against inflationary pressures.

What sets these investments apart is their unique ability to fit into three distinct asset allocation categories: fixed income, property, and alternatives. This versatility enhances their appeal to investors seeking to build well-rounded portfolios that can weather market volatility while capitalising on income streams and hedging against inflationary risks.

Types of alternative investment funds available through Zagga

Invest in property without buying the bricks and mortar.

Eligible investors can earn attractive returns and portfolio diversification opportunities through investing via one of our funds. Investors in a Zagga Fund invest in quality loans to creditworthy borrowers, all mortgage-secured by high-quality, Australian property. Depending on an investor’s situation and objective.

The strategic significance of alternatives

Beyond traditional portfolios:

Alternatives are no longer viewed as peripheral components but have emerged as strategic pillars within well-rounded, well-diversified investment portfolios. With its unique attributes offering portfolio diversification benefits, significant risk-adjusted returns and downside protection, savvy investors are increasingly seeking to invest in private credit (specifically commercial real estate debt) to safeguard returns and provide a hedge against rising rates and inflationary pressures.

Alternative investments to defend returns

As the world emerges and recalibrates from the COVID-19 fugue, the significance of alternative assets in reshaping portfolio allocations cannot be overstated. As traditional investment avenues exhibit heightened volatility and uncertainty, investors are increasingly turning to alternative assets for stability, income generation, and portfolio diversification.

Private credit, exemplified by commercial real estate debt secured by registered mortgages over real property, emerges as a beacon of resilience in turbulent times. Not only does it offer a defensive layer for preserving capital, but it also presents opportunities for steady income streams and hedging against inflationary pressures. The strategic pivot towards alternative investments underscores their important role in fortifying portfolios against market volatility while striving for consistent returns.

As investors continue to recalibrate their strategies and rethink asset allocation, the allure of alternative assets, particularly private credit, shines bright as an indispensable component in the arsenal of modern investment portfolios.