PUBLIC, PRIVATE AND THE WHOLE PORTFOLIO VIEW

After years of historically low yields in public markets, private assets have significantly grown in importance for many investors and their portfolios. But showing clients the role of these assets in a whole portfolio context takes significant time and effort without an analytical engine that can efficiently analyze the data.

When wealth managers and their clients talk about private assets today, the whole portfolio perspective may be absent. That’s because public and private assets tend to be talked about separately in our industry. This isn’t usually deliberate but a result of advisors lacking the ability to analyze data for public and private assets together, forcing them to use a more product- versus portfolio-centric approach.

As private assets continue to become a more attractive option for individual investors, the ability to clearly show their role within an overall portfolio – whether it be diversifying risk, amplifying returns or a combination of both – is becoming a serious differentiator for advisors when speaking with clients.

Without the right analytical engine, doing this can take significant time and effort, making it even harder for advisors to focus on their business and their clients. With the right technology, it’s possible to make this a seamless process.

Data challenges in private markets

While private assets can play an important role in a client’s portfolio, their introduction can create significant data challenges for wealth managers. Private assets tend to have less stringent regulatory disclosure requirements. Asset prices aren’t marked to market at the same frequency as public assets. Private markets have fewer transaction data footprints and more diverse reporting standards compared to public markets, all adding to the challenge of combining the data behind these holdings together.

While there is no silver bullet to overcoming these data challenges, having technology that is built on an analytical engine capable of modeling the risk in these assets – whether by using available data or proxies where necessary can go a long way in helping advisors see private and public assets side-by-side in a client’s portfolio.

Enhancing value with analytics

To show how powerful having these capabilities can be for advisors, take a hypothetical client, Kay Anderson. Kay has come to you, her advisor, given recent market movements to understand whether she should consider adding alternatives to her traditional 60/40 portfolio.

Using technology, you can quickly and seamlessly adjust Kay’s portfolio, discuss the risk and investment impacts, and give Kay comfort that she’s making the appropriate decision based on her overall goals.

Introducing a private equity allocation

Let’s say you decide to show Kay how an allocation to alternatives can amplify returns in her portfolio while diversifying her portfolio’s risk away from equity market beta.

With speed and ease, you can add any number of alternative vehicles to her portfolio and holistically view the impact.

In one instance, you determine that reallocating 20% of her portfolio from public equities to a leveraged buyout fund could help her capture higher returns while moving risk away from the broader equity market. With help from technology, you’re able to quickly analyze how this could impact Kay’s overall portfolio.

Potential risk-adjusted return of a private equity allocation

Risk decomposition with private equity proposal

Not only are you able to easily show Kay how introducing this fund into her portfolio can increase her expected risk-adjusted returns, but you can walk her through a comparison of the risk in her current portfolio and the proposed portfolio.

Seeing this risk broken down by source, you can clearly show Kay that, despite an overall higher level of expected volatility, the sources of risk in this new portfolio have been diversified significantly, reducing her overall exposure to market beta.

You can also bring these analyses to life by showing Kay how her current portfolio and this new proposed portfolio would behave in a series of hypothetical market events.

Hypothetical portfolio performance based on simulated market scenarios(Private equity)

With a few clicks, you can easily produce content and insights that will give Kay comfort as she considers whether an allocation to private equity is right for her.

Let’s consider what would happen if, after seeing this analysis, Kay wants to better understand how she could use an allocation to alternatives to lower her portfolio’s overall volatility, even if that means she’d experience lower risk-adjusted returns.

Pivoting the portfolio allocation, and client conversation, with ease

Again, you can use technology to quickly analyze a range of other alternative allocations in the context of Kay’s overall portfolio and expressed goals. You determine that a 20% allocation to a core real estate fund may be a suitable decision for her.

In the same process as before, you produce an in-depth analysis showing the impact to the risk and return profile of her overall portfolio when reallocating 20% away from equity into real estate.

A different risk-adjusted return profile with real estate

Risk decomposition with real estate proposal

Using these analyses, you can show Kay how an allocation to real estate lowers her portfolio’s overall volatility while reducing her exposure to market beta. Not only does this new portfolio have less overall risk, but the sources are far more diversified than her current portfolio.

You can again expand on these figures by showing the substantial difference between her current, and the proposed, portfolio’s hypothetical performance across a range of simulated market scenarios, highlighting events that are most relevant to Kay’s situation and the overall market environment.

Hypothetical portfolio performance based on simulated market scenarios (Real estate)

What if Kay decides she wants to consider how she could combine these alternative assets, and others, to achieve different risk/return or diversification outcomes?

With the right analytical engine – one that can leverage both available alternative investment data as well as proxies where relevant – advisors can quickly generate analyses that facilitate deeper, more insightful conversations about what changes may make sense for a client’s portfolio.

Enhancing portfolio construction with comprehensive analyses

What’s the right decision for Kay? That is ultimately up to her and her advisor. But introducing the right technology and analytical capabilities can greatly enhance the process while making it more seamless for her advisor. For many wealth managers today, the kinds of analyses seen above take a considerable amount of time and effort, leaving less time for advisors to engage with clients and grow their business. But without these kinds of insights, it’s difficult for advisors to deliver the kind of transparency clients are looking for.

The right technology can bring more sophistication to an advisor’s portfolio management process and equip them with the content needed to deliver clients transparency into how their portfolios are being managed. It can also free up considerable time for advisors to spend more time focusing on their clients and book of business. In all, advisors with the right tools can deliver a more personalized client experience with a level of transparency that few advisors can today.

Learn more about Aladdin Wealth™

The Aladdin Wealth™ platform provides analytics for wealth managers who want more clarity on how private assets work within a client’s whole portfolio. Our proprietary risk factor model can provide a deeper understanding of portfolio risks to help advisors and portfolio managers with portfolio construction decisions while adding meaningful value to long-term, client relationships.