KKR’s Henry McVey Publishes “Rethinking Asset Allocation”October 23, 2018
New Report Addresses Common Questions from CIOs and Offers ‘Rules of the Road’ for Investors Who Oversee Multi-Asset Class Portfolios with Exposure to both Liquid and Illiquid Investments
“Low bond yields, a surge in geopolitical tensions, and a shift towards fiscal stimulus have all fueled a rethinking of how to best generate strong risk-adjusted returns,” McVey says. “Against this backdrop, we have tried to articulate actionable solutions to many of the most complex investment questions that we are increasingly fielding from clients who – like us – use a rigorous, top-down approach to asset allocation.”
He continues, “An important message, we believe, is that – amidst lower expected returns – the traditional relationship between stocks and bonds is now mean-reverting after a 20-year hiatus. As such, we think that the lion’s share of multi-asset class portfolios likely need to be properly restructured for the new environment that we envision.”
McVey and his team offer detailed analysis, backed by nearly 75 data exhibits, around the following multi-asset investment trends:
- Beyond traditional diversification techniques, KKR believes that there are at least four long duration, macro-oriented investment themes that may help portfolio managers generate significant out performance during the next 5- to 10- years. While each theme is different, there is common thread amongst all of them: Buy Complexity and Sell Simplicity.
- Both the definition of Private as well its drivers of value have changed meaningfully in recent years. At this point in the cycle, Private Equity will likely outperform Public Equity, though manager selection remains a key performance variable.
- Given the significant decline in interest rates in recent years, the value of the illiquidity premium in Private Credit has increased materially. However, competition is intensifying in this market, and we now favor Private Credit more closely linked to nominal GDP.
As quantitative easing is transitioning towards quantitative
tightening, many governments are shifting their focus towards fiscal
stimulus in an effort to boost nominal GDP. In the
U.S., interest rates have tended to run moderately below the level of nominal GDP growth as long as the Fed was not actively trying to suppress run-away inflation. We maintain this view, but we are keenly mindful of rising deficits, particularly in the United Statesand Europe.
- In terms of portfolio construction, KKR’s ‘Rules of the Road’ articulate the toolkit that can be implemented to create better risk-adjusted outcomes, particularly as more and more CIOs seek new and innovative ways to deliver returns by way of differentiated opportunities across both private and public markets. While there are many aspects of portfolio construction to consider, the ‘Rules’ focus on four key portfolio construction metrics: pacing, correlations, proper comparisons for private market assets, and liquidity.
Links to access this report as well as an archive of
- To read the latest Insights: click here.
- To download a PDF version: click here.
- To download the KKR Insights app for iOS click here, and for Android click here.
- For an archive of previous publications please visit www.KKRinsights.com.
KKR is a leading global investment firm that manages multiple
alternative asset classes, including private equity, energy,
infrastructure, real estate and credit, with strategic manager
partnerships that manage hedge funds. KKR aims to generate attractive
investment returns for its fund investors by following a patient and
disciplined investment approach, employing world-class people, and
driving growth and value creation with KKR portfolio companies. KKR
invests its own capital alongside the capital it manages for fund
investors and provides financing solutions and investment opportunities
through its capital markets business. References to KKR’s investments
may include the activities of its sponsored funds. For additional
The views expressed in the report and summarized herein are the
personal views of
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