CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In the latest episode of the Alternative Allocations podcast, I had the pleasure of sitting down with Dana D’Auria, Chief Investment Officer of Envestnet Solutions. Dana and I discussed the growing demand for model portfolios, and how Envestnet is responding to meet advisors’ needs.
In my travels with advisors, I increasingly hear questions about the mechanics of adding private markets and creating model portfolios that can be scaled across advisory practices. Similarly, I hear from headquarters about the need to create models to provide greater consistency and an improved client experience. So, I began our discussion by asking Dana about some of the unique complexities of building models with private markets, including structure, liquidity and operational challenges.
Dana pointed out that, “Envestnet is a platform designed to help the advisory and the home office community use these instruments in a model context.” She added that the firm can assist in technology, implementation and due diligence, among other areas. Depending on how the platform is being used, Envestnet may offer risk ratings, asset class returns and capital market assumptions to assist advisors.
Dana and I discussed the growth of the evergreen fund structure and how that has helped provide access to these unique investments. Given the recent noise around redemptions and gating, I wanted Dana to weigh in on the structural tradeoffs and the need for education. She stated that, “. . . understanding the liquidity of these is obviously a big piece… educating properly, making sure that the advisor base truly understands that the underlying investments are illiquid, and then they in turn can convey that to their client base.”
Structural considerations
Tender-offer and Non-traded REITs typically offers quarterly liquidity at board discretion, while interval funds quarterly liquidity provisions are mandatory.
Sources: Interval Fund Tracker 2021. Investment Company Institute, ”Interval Funds: Operational Challenges and the Industry’s Way Forward,” p.7.
With the growing adoption of private markets in the wealth channel, I asked Dana about resources for advisors. She pointed out that many of the larger asset managers and platforms create content for advisors, from foundational to advanced materials. She noted that CAIA (Chartered Alternative Investment Analyst) is, of course, a tremendous resource, and for those willing to commit the time, the CAIA designation or one of their micro-credentials are of great value.
Given some of the recent noise in the marketplace, I asked Dana about her outlook for private markets. She noted that her outlook remains very positive but stated, “There needs to be an understanding that there is a larger dispersion of return amongst managers in an asset class, like private equity, than in a public market asset class.” She emphasized that advisors need to understand the structural tradeoffs and the illiquid nature of private markets.
As an industry, we have experienced an ever-growing adoption of private markets in the wealth channel. Model portfolios can help advisors efficiently allocate capital and access world-class managers. We will need to continue to educate both advisors and investors about the versatility of these new investments, the structural tradeoffs between drawdown and evergreen funds and the changing mind-set of allocating capital for the long term.
The purpose of the Alternative Allocations podcast series is to address the challenges and opportunities above in an honest and transparent fashion.
To listen to any previous episodes, please visit Alternative Allocations Podcast | Alternatives by FT. We encourage you to subscribe so you never miss an episode.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Past performance does not guarantee future results.
Investments in alternative strategies may be exposed to potentially significant fluctuations in value.
Investment strategies involving Private Markets (including investments in private companies and/or securities) are complex and speculative, entail significant risk, should not be considered a complete investment program, and are suitable only for persons who can afford to lose their entire investment. Such strategies may have limited liquidity in both the investment products and their underlying investments. Underlying investments may never list on a securities exchange and lack available information due to their private nature. These factors may negatively impact such investments’ market value and a manager’s ability to dispose of them at a favorable time or price. Additionally, certain investment fund types mentioned are inherently illiquid and suitable only for investors who can bear the risks associated with the limited liquidity of such funds. Such funds may only provide limited liquidity through quarterly repurchase offers that may be suspended at the discretion of the manager or the fund’s board. There is no guarantee these repurchases will occur as scheduled, or at all. Shareholders may not be able to sell their shares in the fund at all or at a favorable price.
An investment in an interval fund is not suitable for all investors. Unlike closed-end funds, an interval fund's shares are not typically listed on a stock exchange. There is also no secondary market for the fund's shares, and none is expected to develop. An investment in the fund should be considered illiquid. The fund may be able to invest in private securities that are illiquid and thinly traded, which may limit the manager's ability to sell such securities at their fair market value or when necessary to meet the portfolio's liquidity needs. There is no guarantee that an investor will be able to tender all or any of their requested fund shares in a periodic repurchase offer. Shareholders should not expect to be able to sell their shares regardless of how the fund performs.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Investments in underlying funds are subject to the same risks as, and indirectly bear the fees and expenses of, the underlying funds.
Diversification does not guarantee a profit or protect against a loss.
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