The calendar has turned, but the investment landscape still retains vestiges of the past several years’ dominant economic trends — and will for some time to come. It amounts to a new paradigm for the economy with crucial implications for advisers and their clients, and potentially a very attractive backdrop for generating returns, with help from alternative investments, or alts.
As 2025 begins, we believe the economy is experiencing a different kind of landing that defies easy categorization — one in which inflation and monetary policy rates settle but stay structurally higher than they were pre-COVID, with higher economic growth, too.
Considerable cash remains on the sidelines. Many advisers who are confident that the U.S. economy still has room to run believe that they need to put cash to work. Yet, they recognize, too, that public equity market valuations are stretched — indeed, for many investors, overexposure to U.S. equities is perhaps an even bigger risk than sidelined cash. Advisers see, too, that uncertainty about Fed policy and inflation’s direction has sparked public bond market volatility. At the same time, advisers need to address the expectations of clients who have just experienced back-to-back years of 20%-plus returns for the S&P 500.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This landscape — particularly the persistence of relatively higher interest rates — reinforces what we believe to be private market assets’ well-established diversification and return advantages. But some first steps are advisable before putting an alternatives allocation in place:
- Consider the market’s full range. U.S. private markets provide access to 23 times more* companies than public markets, offering exposure to a broad spectrum of non-traded sectors, such as private equity, private credit, private real estate, real assets such as farmland, infrastructure and more. For many investors, alts should be considered essential portfolio building blocks.
- Assume an appropriate investment horizon. While the short term can provide valuable clues about good entry points for an alts allocation, an investor generally needs to plan on holding the allocation for a minimum of five years in order to fully earn alts’ long-term diversification and return benefits.
- Understand liquidity needs. A rigorous planning exercise that accurately assesses liquidity requirements will give both adviser and client the confidence to add an appropriate allocation to semi-liquid or less-liquid assets.
Some potential investing ideas
Here are some of our leading private markets ideas:
- Private real estate. We see real estate as a potential “comeback kid” in 2025. For several years, the sector has been shunned due to the high-rate environment, which imposed a significant headwind on new construction across property types — and constricted the emergence of new supply. A strengthening economy with somewhat limited real estate supply bodes well for demand, though not necessarily in the central business district office sector; we see better opportunities in sectors such as industrial, medical office and senior living facilities.
- Private credit. The private credit space has exploded in recent years, but it is not a go-anywhere strategy — it demands selectivity. We see appealing opportunities in the higher quality areas of middle market direct lending to private equity-backed companies. Middle market loans may continue offering attractive yields even as base rates decline, representing a consistent and resilient source of cash flow in either a hard or soft landing for the U.S. economy. In our view, attractive all-in yields coupled with a potentially renewed M&A environment in 2025 sets up private credit to be a relative outperformer.
- Farmland investments. Farmland is perhaps the ultimate portfolio diversifier, with inelastic demand for the end product (food) and strong income gains over decades driven by increased productivity in the farmland space. We believe technological progress in farming — a huge factor in the sector’s unique return profile — will continue going forward.
Advisers who believe that their real value lies on the investment side via customized portfolio design — particularly for a younger generation of clients accustomed to personalization in so many aspects of their lives — need to consider alts part of their strategic mix.
They need to recognize, too, that, going forward, dispersion of private market returns may be far greater than for publicly traded assets — making the due diligence offered by a partner with deep multiasset experience an essential prerequisite for building a portfolio under a new economic paradigm.
* Source: Bloomberg, as of 31 Dec 2023. Representative Indexes: U.S. LC Growth (Russell 1000 Growth Index), U.S. LC Value (Russell 1000 Value Index), Non-U.S. Stocks (MSCI ACWI Index), Private Credit (Cliffwater Direct Lending Index), Private RE (NCREIF ODCE Index), Cash (Bloomberg U.S. Treasury Bill 1-3 Months Index), Core Bonds (Bloomberg U.S. Agg Index), HY Bonds (Bloomberg U.S. Corporate High Yield Index), Munis (Bloomberg Municipal Bond Index), Diversified Portfolio (20% U.S. LC Growth, 20% U.S. LC Value, 10% Non-U.S. Stocks, 10% Private Credit, 10% Private RE, 2% Cash, 10% Core Bonds, 4% HY Bonds, 14% Munis). Private as of 30 Sep 2023. Diversification does not assure a profit or protect against loss.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or investment strategy and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with their financial advisors. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. This material should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
Nothing set out in these materials is or shall be relied upon as a promise or representation as to the past or future. This material, along with any views and opinions expressed within, are presented for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as changing market, economic or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. There is no representation or warranty (express or implied) as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved.
Investors should be aware that alternative investments are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. 4135887-0925
Related Content
-
Should You Do A Roth IRA Conversion? Nine Things to ConsiderThe Tax Letter Thinking of converting a traditional IRA to a Roth IRA? The Kiplinger Tax Letter Editor highlights nine factors you should consider before making a move.
-
33 Stocks That Could Rally 50% or More This YearAnalysts say these S&P 500 stocks have at least 50% price upside over the next year or so.
-
33 Stocks That Could Rally 50% or More This Year
Analysts say these S&P 500 stocks have at least 50% price upside over the next year or so.
-
Stock Market Today: Dow Drops 971 Points as Powell Pressure Ramps UpPresident Trump is increasing his attacks against Jerome Powell, insisting the Fed chair cut interest rates.
-
When Should You Hand Over the Keys — to Your Investments?The secret to retirement planning? "The best time to hand over the keys is before you’ve realized you need to hand over the keys."
-
Going to College? How to Navigate the Financial PlanningCollege decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
-
Financial Steps After a Loved One's Alzheimer's DiagnosisIt's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
-
How Soon Can You Walk Away After Selling Your Business?You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
-
Two Don'ts and Four Dos During Trump's Trade WarThe financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
