Report Highlights Opportunities Across Hedge Funds, Private Equity, Private Credit, Real Estate, Infrastructure and other Real Assets, and Liquid Alternatives
NEW YORK, Jan. 15, 2020 /PRNewswire/ -- J.P. Morgan Asset Management today released its second annual Global Alternatives Outlook, providing a 12-18-month outlook across key alternative asset classes and highlighting the views of the CEOs, CIOs and strategists from the firm's 15 distinct alternatives investment engines. The report offers an assessment of opportunities in alternatives as investors look to construct resilient portfolios in an environment of high public equity valuations and lower fixed income yields.
"As the current market environment continues to drive investors towards alternative asset classes in search of yield and diversification, our Alternatives Outlook examines strategies across a broad array of alternative asset classes," said Anton Pil, Global Head of Alternatives, J.P. Morgan Asset Management. "In this delicately balanced investment climate, investors should increasingly consider the role alternatives can play as both a diversifier and a potential source of steady income without adding to a portfolio's equity risk."
"Across the industry, there remains a lack of nuanced alternatives investment guidance that reflects the complexities of the asset class. Our 2020 Alternatives Outlook leverages the expertise and 50-year track record of our USD $146 billion alternatives platform to deliver investors with insights that can meaningfully impact broader portfolio design and implementation," continued Pil.
The 2020 Alternatives Outlook also provides an alternatives framework for investors to build resilient portfolios, by categorizing asset classes according to their role in the portfolio, divided into core foundation, core complements and potential return enhancers.
The report reveals several key findings across asset classes:
Digital transformation to drive opportunity - As tech spending continues across industries, opportunities are expected to arise as digital initiatives go mainstream, fueling capex1 and rising demand for software and services. Increased application of machine learning will continue making a positive impact on hedge funds.
Sustainability-led disruption to continue - 2020 will be a critical year2 for hedge fund managers to increase the integration of Environmental, Social and Governance (ESG) criteria and sustainability across their businesses and investment activities. The next sectors experiencing sustainability-led disruption include transport, agriculture, automotive, buildings and industrials.
Value expected to rebound - Value is seen as one of our best bets as we expect a rebound to reverse a factor trend prevalent since early 2017. We see a bubble building among lower quality, higher growth names, so based on investors' investment objectives and risk appetite, the opportunity could come from selective short exposure, rather than just being long the value factor.
Too much money chasing too few deals? - Although significant capital has been raised for core infrastructure, it is from a relatively low base and private capital remains a small percentage of the market's overall financing. In our view, equity returns remain attractive relative to other traditional asset classes, particularly on a risk-adjusted basis.
Core infrastructure remains relatively attractive - Core infrastructure equity risk-adjusted returns remain attractive on a relative basis, but we're seeing some investors increase their risk tolerance in order to maintain expected returns. Based on their investment objectives, investors should focusing on assets that have the ability to provide clear visibility into long-term yield.
ESG focus remains critical - A focus on ESG considerations continues to be fundamental and aligns closely with the objectives of infrastructure investments. Renewable energy's environmental benefits are lifting both supply and demand in the sector, resulting in the availability of long-term contracts aligned with the investment objectives of the asset class.
Increasing stability across sectors - In this period of low yields, the core-plus transport sector could be considered as an attractive proposition for investors looking for assets classes with potential for reliable income streams resultant from long-term leases, low leverage and the financial strength of high quality, often investment grade, end users.
Modest trade tensions impacts - Despite declines in China-U.S. trade volumes, the trade tensions have had a less severe impact on seaborne trade than many had expected. Overall, substitutions in the supply chain have mitigated the impact of the trade tensions, as we anticipated in the 2019 Global Alternatives Outlook.
New cleaner fuel regulations in 2020 - As of Jan. 1, 2020, a new International Maritime Organization regulation requires ships to meet more demanding fuel emission standards. Core-plus investors could consider focusing on modern, fuel-efficient vessels; these are the most attractive to lessees with long-term, ESG focused, transportation requirements.
Demand for access to U.S. consumer - Amid nervousness about corporate lending, we are witnessing demand for exposure to U.S. housing and consumer credit. One popular strategy has been mortgage origination to the self-employed and those who are strong financially but are disqualified by their FICO score.
Other opportunities in private credit in 2020:
- Longer duration, less-liquid mid cap company debt - At a time when the market places a high premium on liquidity, our investors see significant value and a more attractive risk-reward trade-off in less-liquid middle-market corporate issues, relative to those of larger and more liquid issuers.
- Distressed lending and nonperforming bank loans - Strategies include "re-performing" assets created during loan modifications and restructurings, or purchased at a discount after an issuer's creditworthiness is re-rated.
- Commercial Mortgage Loans - Another mortgage strategy is core, high-quality multi-family, industrial and office lending in the U.S. Southwest and West.
Opportunities in smaller private companies - While corporate finance deals are increasingly competitive, we still see relatively attractive opportunities in firms with revenues of USD $10 -$100 million. These investments tend to stay below the radar and be less leveraged, with less inflated valuations than more prominent deals.
Digital innovation showing promise - With innovation most likely to emerge from smaller, lesser-known, private enterprises, high-growth opportunities will be difficult to find. E-commerce, cybersecurity, and software-as-a-service (SaaS) are a few areas where we continue to see tremendous promise.
Increasing ESG focus - We are encouraged by investors' increasing focus on ESG dimensions. We have an established approach to incorporating ESG factors into our investment process3 and assist portfolio companies and managers with which we invest to carefully consider ESG factors in their own business and investment practices.
U.S.—Beyond the traditional core - Extended core sectors are making up an increasing share of private real estate allocations as investors come to better understand these opportunities. Our teams preferred opportunities include single family rentals, biotech, self-storage and data centers.
Opportunities in U.S. Mezzanine debt - Our team favors two sectors while looking for income and diversification: high-quality, well-leased multi-family properties, generally outside of the super-luxury apartment sector, and stabilized multi-tenant office buildings in established markets exhibiting strong employment growth.
Europe — A heterogeneous core - Overall, modest economic growth, low vacancy rates and limited new supply should support rental growth in major European markets. As in the U.S., we see investors becoming more active in extended core sectors. However, since many of these sectors are in their infancies in Europe vs. the U.S., it may take longer for these core opportunities to become accessible in Europe at scale.
Asia Pacific — Still growing its traditional core - APAC appears to be at a slightly earlier stage of the economic cycle vs. U.S. and Europe. APAC core real estate returns and the diversification opportunities the market can provide are attracting investors' attention globally. Some diversifying opportunities exist in logistics, core office markets and multi-family markets.
To view the full 2020 Alternatives Outlook click here.
About J.P. Morgan Global Alternatives
J.P. Morgan Global Alternatives, the alternative investment arm of J.P. Morgan Asset Management. With 50 years as an alternatives investment manager, more than $146 billion in assets under management and over 700 professionals (as of September 30, 2019), we offer strategies across the alternative investment spectrum including real estate, private equity and credit, infrastructure, transportation, liquid alternatives, and hedge funds. Operating from 18 offices throughout the Americas, Europe and Asia Pacific, our 15 independent alternative investment engines combine specialist knowledge and singular focus with the global reach, vast resources and powerful infrastructure of J.P. Morgan to help meet each client's specific objectives. For more information: www.jpmorganassetmanagement.com.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of $1.9 trillion (as of September 30, 2019), is a global leader in investment management. J.P. Morgan Asset Management's clients include institutions, retail investors and high net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity.
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1 USD 1 trillion in capex, globally, is expected in the coming 10 to 15 years, accelerating in 2020 and 2021.
2 Following a landmark 2019, when "climate emergency" was the Oxford Dictionaries Word of the Year.
3 Private Equity Group (PEG): Incorporating Environmental, Social & Governance (ESG), J.P. Morgan Asset Management, 2018
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SOURCE J.P. Morgan Asset Management