Phil Waller has been working at JP Morgan AM for ten years, most of that time in private markets. He is currently the investment specialist leading the firm’s European team for alternative investment solutions, with a clear mission: to guide and support JP Morgan AM clients in building alternative allocations tailored to their needs, and to provide access to alternative strategies to increasingly diverse types of investors.
“The democratization of alternatives is a major goal for the industry and a major goal for us for the coming years,” he states emphatically. JP Morgan AM currently manages $213 billion in alternative assets.
At a forum recently organized by the firm in London, Funds Society had the opportunity to speak with Waller about his approach to alternatives, an asset class that, in the expert’s opinion, is too often used as a “catch-all” to define all those assets that are not fixed income or equities, but which actually encompasses a broad investment universe.
At JP Morgan AM, they have decided to focus on five major sub-asset groups: private equity, private credit, real assets (real estate, infrastructure, transport), hedge funds, and liquid alternatives. “These are major categories, and each behaves very differently, offering distinct qualities,” Waller points out, recommending those new to the world of alternatives “think about the set of opportunities they offer.”
Is there a real growing interest in alternative assets? How has the universe of alternatives evolved over the last year?
One of the major developments in the last 12-18 months is, obviously, that the interest rate environment has changed significantly. The major impact of this is that investors now have more options when it comes to earning income. Thus, a more detailed conversation can be had about one of the benefits of alternatives. When it comes to income-oriented alternatives, the approach for investors now is that not all income is equal; they can value the various options more broadly across different asset classes.
At the same time, as interest rates are now higher, some asset classes have benefited, like private credit. What used to be an 8-9% return is now 12 to 13%.
Is there room for new types of investors in alternatives, including retail investors?
Yes, absolutely. Institutional investors have been allocating to alternatives for decades. That has not diminished after the financial crisis. In fact, many institutions are now allocating 20% of their assets within alternatives, some even closer to 50%, because they have longer-term horizons.
On the other hand, individual investors, particularly in Europe, have allocations to alternatives that are in the low single digits, excluding their properties. They are really not taking advantage of the long-term nature of this asset class. We think there is a great opportunity for asset managers like ours to create greater access and education and, ultimately, for individual investors to continue allocating part of their portfolios to alternatives. However, individual investors still need to consider alternatives as an illiquid and long-term allocation, and need their investment horizon to match that.
What kind of conversations do you have with your clients so they can understand the different types of alternatives and their characteristics and qualities?
When it comes to alternatives, some types of clients are very sophisticated, but others have great needs for financial education. Ultimately, we seek to talk to clients about what alternatives bring as opposed to what alternatives are. Are you looking for a stable level of income? Are you looking for inflation mitigation?
The other conversation revolves around the greater offering in private markets. Now, if I do not invest in private markets, I am ignoring a very large part of the investable universe. Companies used to stay private for an average of about four years, now they can remain for more than 12 years and often coincide with the fastest growth phase of their lifecycle. Therefore, gaining access to these companies at that time is a significant added value.
The way we communicate with investors is ensuring that they are goal-oriented, making sure it is done for the right reason, ensuring they understand the benefits, but also the risks of each asset class, given some of the complexities and the illiquidity that comes with these asset classes.
Do you think the model 60/40 portfolio should evolve to also include a structural allocation to alternative assets?
The alternative solutions team at J.P. Morgan AM has been assisting clients, but also building these diversified portfolios. Our view is that it should be a significant allocation for long-term investors. Now, whether it is 20% or 30% will depend very specifically on the investor’s requirements: investment horizon, risk profile, return expectations… What is really important is what is in that 20%. Getting the right mix between income and capital appreciation is really key within the allocation to alternatives in a portfolio. A more granular approach is needed to build it.
Where are you finding investment opportunities currently?
We have divided it into three major categories. The first covers markets that have experienced some dislocation, particularly those more sensitive to interest rates – such as in real estate – or that have experienced notable flows. One of the major trends we saw in 2022, and that has continued into this year, has been that some institutional investors were overweight in alternatives, especially in private equity and private credit and this has created a bit more supply in the secondary market; as they rotate their positions they have created the capacity to invest at a discount. And that has been attractive both for private equity and for private credit.
The second major category is disruption. A big area where this is happening is in private equity, with the emergence of new industries. We have also seen disruption in real estate, due to the boom in teleworking.
Finally, we are seeing that some of the more institutional investors are focusing a lot on the aspects of diversification of alternatives. Core allocations, such as infrastructure or transport, have been a major focus of interest, along with hedge funds.
