Portfolio Insights: Introducing illiquid assets into a global multi-asset portfolio

Candriam
By May 9, 2022 14:57

Portfolio Insights: Introducing illiquid assets into a global multi-asset portfolio

Executive Summary

We demonstrate the building blocks for investors who may either be considering allocating to illiquid assets for the first time, or who want to gain a greater understanding of how much capital they should invest in illiquid assets.

For long-term investors, there are multiple benefits of introducing illiquid assets into an investment portfolio. These include an expanded investment opportunity set, improved diversification and a lower equity beta, greater potential return in comparison to listed assets, and a potential inflation hedge in the case of real assets. Moreover, during periods of market turmoil, illiquid asset classes may avoid some of the downside price pressures.

However, sizing the optimal share of investments in illiquid assets can be quite challenging. To address the allocation sizing, we show the results of a simple Mean-Variance framework and describe some adjustments to make its results more robust. Nevertheless, determining an appropriate portfolio allocation in a particular instance means having a view on expected returns, considering uncertainty, accessing hidden risks, and understanding an investor’s individual constraints and objectives. We demonstrate one method of addressing the concern of infrequent valuation data.

Relying on our own market return projections as a first scenario, we show that from an European investor’s perspective adding illiquid assets significantly improves the portfolio’s risk-adjusted return, not only by providing an extra source of return, but also by mitigating the overall portfolio’s risk (volatility, VaR, CVaR).

Expanding to encompass different risk scenarios, we present conservative, balanced, and aggressive risk profiles and find that the optimal share of investments in illiquid assets lies between 5-25%.

Candriam
By May 9, 2022 14:57

SEARCH