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CONTRIBUTORS

Tony Davidow, CIMA®

Senior Alternatives Investment Strategist
Franklin Templeton Institute

We recently hosted a group of global institutional clients for an educational event in our San Mateo, CA, headquarters. Our clients joined us from 23 different countries including Singapore, the Philippines, Thailand, Brazil, Mexico, Chile, Saudi Arabia, South Africa and Malaysia. The program highlighted the depth and breadth of resources offered by Franklin Templeton and our Specialist Investment Managers (SIMs), and we examined the global economies, capital markets and opportunities across traditional and alternative investments.

I served as the host and moderator on a dedicated day focused on alternative investments and began the day by highlighting the alternative allocations across institutional segments (see the chart below). Consistent with our clients, institutions have varying degrees of allocations based on their size, access and the sophistication of the investment committee.

The allocations also vary by institutional segment. Pension plans (public and private) can model their cash flow needs due to the predictable nature of retirement distributions. Endowments, foundations and sovereign wealth funds’ time horizons are often viewed in perpetuity. Consequently, their respective allocations vary based on the amount of assets allocated to alternatives and the types of alternative investments included.

How Institutions Allocate to Alternatives

Alternative Diversification Among Institutional Investors
As of February 5, 2023

Sources: Prequin, CAIA Association (2023).

While the program was attended by institutional clients, there were certain messages that apply to all client segments. The merits of alternative investments are universal; however, the way that they are used by institutions and individuals varies based on access, eligibility, risk appetite and liquidity needs among other issues. These were some of the valuable lessons learned from institutions:

  • Establish a goal, or desired outcome, for each investment before allocating.
  • Evaluate strategy and structure—both are important.
  • Develop a process for evaluating each underlying investment.
  • Due diligence should include investment and operational due diligence.
  • Understand the liquidity of the underlying investment.
  • Evaluate the current environment to determine how each investment should perform.

Throughout the day, our clients were engaged in challenging the various experts regarding the growing alternative marketplace, which asset classes present the best opportunities, and how to evaluate and incorporate alternatives appropriately.

In future articles, we will examine the opportunities in secondaries, alternative credit strategies and the diversity of commercial real estate.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Alternative strategies may be exposed to potentially significant fluctuations in value.

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