CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist,
Head of Franklin Templeton Institute
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
Preview
We recently explored “Building Better Portfolios with Alternatives: A Goals-Based Framework.” After setting the stage with a discussion on the current market environment, Tony shared his research on the wealth management community’s growing adoption of alternative investments, and then used a series of case studies to illustrate the impact of adding alternative investments to improve the likelihood of achieving client goals. Use the download PDF link on the right to read a few of the key takeaways of our discussion (log-in required.)
WHAT ARE THE RISKS?
All investments involve risk, including loss of principal. Past performance is no guarantee of future results.
Liquidity risk considerations:
An investment in alternative securities (such as, but not limited to, private equity, private debt/credit, and private real estate) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. Such alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment.
Risks related to private securities and transactions:
The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. 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.
An investment strategy focused primarily on privately held companies presents certain challenges and involves 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. Private equity investments involve a high degree of risk and is suitable only for investors who can afford to risk the loss of all or substantially all of such investment. Private equity investments may hold illiquid investments and its performance may be volatile.
Other Investment risks:
The risks associated with a real estate strategy include, but are not limited to various risks inherent in the ownership of real estate property, such as fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by general and local economic conditions, the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, environmental laws, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). The value of most bond funds and credit instruments are impacted by changes in interest rates; bond prices generally move in the opposite direction of interest rates. Investing in lower-rated or high yield debt securities (“junk bonds”) involve greater credit risk, including the possibility of default, which could result in loss of principal—a risk that may be heightened in a slowing economy. Investments in derivatives involve costs and create economic leverage, which may result in significant volatility and cause the fund to participate in losses (as well as gains) that significantly exceed the fund’s initial investment in such derivative. Diversification does not guarantee a profit or protect against a loss.