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Alternative Assets  + Latest News  + Real Estate  | 
“Alternative” Ways to Make Money: Interview with Dave O’Brien of Asset Strategy Advisors

“Alternative” Ways to Make Money: Interview with David O’Brien of Asset Strategy Advisors

Alternative investments aren’t simply growing they are becoming a mainstream part of investment management. Two primary trends are responsible for this development: a shift in investor benchmarks from relative to absolute return and the convergence of traditional and alternative asset classes, investment managers and products. 

While alternative investments on their own may have higher volatility than more traditional investments, they typically have low correlations to, or do not move in lockstep with, more traditional asset classes. Facing moderating economic growth, higher inflation and low but rising interest rates, investors may find it increasingly difficult to generate stable income-driven returns and alpha through the public markets alone. Alternatives can deliver on both fronts. 

Connect Money, in an email interview, asked David O’Brien, Senior Consultant at Asset Strategy Advisors, a Boston-based registered investment advisory firm, about his firm’s asset allocations and strategies for alternative investments. O’Brien also shared his views on the fixed income markets. 

For many years, alternative assets were viewed as risky given their lower liquidity, less regulation, lower transparency, higher fees and limited, and potentially problematic, historical risk and return data. 

Q: What is your recommended portfolio construction when it comes to alternative assets, and what are your preferred investments within the sector?   

A: Anything outside of stocks, bonds and cash can be considered an alternative asset. Many are publicly traded and easily accessible through mutual funds and ETFs. Things like commodities, precious metals and managed futures are accessible and liquid so we will allocate to those sectors for all clients when we feel they are attractive. Some alternative assets like private equity, private credit and private real estate are harder to access because they are illiquid and only available to accredited investors, qualified purchasers, or institutional investors.    

The main tradeoff between public and private investments is liquidity, so the primary question we ask before allocating any client assets to private investments is how comfortable is the client with a lack of liquidity? The amount, if any, we allocate for a client’s portfolio to private investments will depend on the client’s eligibility, time horizon, goals, and comfort level with illiquid investments.   

The investment industry has evolved recently to try to bridge this liquidity gap with interval fund structures. Interval funds look a lot like traditional mutual funds but can own illiquid investments by limiting how frequently investors can redeem their investments, typically quarterly. Interval funds have opened the door for many clients to allocate a portion of their portfolio to private markets than they would be able using traditional private placement structures. Currently, we have an allocation to private real estate through an interval fund in our model portfolios. 

Perhaps the case for active management and the need for diversification has never been stronger as it tends to produce lower correlations, lower volatility and historically, if you look at certain periods, higher returns.  

Q: Within your recommended real estate allocation, where do you see the investments that improve yield?   

A: Real estate can provide investors diversification, current income, capital appreciation and a potential hedge against inflation. Publicly traded Real Estate Investment Trusts (REITs) trade like any other stock and are highly correlated to the broader stock market, so they don’t offer significant diversification benefits.  Publicly traded REITs typically have lower yields than their private counterparts and are more volatile. Private Real Estate historically does offer diversification benefits, higher income, and lower volatility, but is less liquid.    

Private Real Estate comes in a variety of flavors, each offering different benefits to investors. Core real estate strategies focus on high quality properties with high occupancy rates and offer potential for steady cash flow from rents with some potential capital appreciation. Value added real estate strategies focus on repositioning properties or improving them to increase occupancy and rental income. These strategies may have some current income but offer the potential for greater capital appreciation with more risk than core strategies.   

Development funds are more speculative but offer the greatest potential capital appreciation, but little if any income. Depending on the clients’ goals, time horizon and suitability we recommend allocating a portion of their portfolio to private real estate strategies. For our traditional asset allocation portfolios, we have introduced an interval fund that invests in a variety of private real estate funds to increase diversification and current income. 

It has been covered broadly that stock valuations have become untenable. Inflation is at its highest level in 40 years and rates are expected to gradually increase in the years ahead. 

Q: What conditions would you need to see to alter your recommended portfolio strategies? 

A: We are not market timers, but we do adjust our asset allocation models by tilting them based on a variety of indicators we follow. One thing we know with certainty is that things change. By periodically rebalancing portfolios we force ourselves to sell high and buy low. Momentum, both positive and negative, can help us decide if we want to overweight or underweight certain asset classes.   

Within our portfolios we may adjust risk levels by changing the makeup of our allocations. As it relates to fixed income, as the Fed has increased interest rates we shifted to shorter duration and floating rate strategies. When it appears, the Fed has stopped raising rates, we will shift our holding to longer duration funds that should benefit from higher yields and potential appreciation if the Fed starts lowering rates down the road.  We will also adjust the amount of credit risk we take depending on the strength of the economy and potential for credit spreads to narrow. 

The value proposition for bonds is that they tend to provide liquidity, diversification and positive total returns. Despite the historically poor returns in 2022, that value proposition has improved recently. Given the rise in Treasury yields bonds look as good as they have in quite some time.    

Q: Do you have an asset allocation strategy in your clients’ portfolios that includes bonds and if you don’t, would you consider it?  

A: Much ink has been spilled about how the traditional balanced portfolio did not work in 2022. The S&P lost 18.1% and the Barclays Agg lost 13%. This was the first year since the Agg index was started in 1976 that both stocks and bonds were down!  

In 2022 just about every asset class we track was down except for commodities, precious metals, managed futures, and private real estate. It would be easy to think that a balanced portfolio does not work anymore, but we have not made that determination based on one year.  

If anything, as you stated, bonds now offer attractive yields and potential for capital appreciation. As I mentioned earlier, we can adjust the type of bonds we own and the percentage we allocate to fixed income. While 2022 was a difficult year for traditional balanced portfolios, it shined a light on the benefits of adding alternative investments to diversified portfolios. 

Disclosures: 

David O’Brien offers advisory services through Asset Strategy Advisors, LLC (ASA), an SEC-registered investment advisor; securities offered through Concorde Investment Services, LLC. (CIS), member FINRA/SIPC; and insurance services offered through Asset Strategy Financial Group, Inc. (ASFG). ASA, CIS, and ASFG are independent of each other.  

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Indivdiuals should consult the appropriate professional regarding their individual circumstance.  Past performance is not indicative of future results. Potential returns are not guaranteed and may be lower than anticipated when investing. 

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 

Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. Investing in alternative assets are suitable only for sophisticated investors. 

There are risks associated with these types of investments and include but are not limited to the following: Typically, no secondary market exists for the security listed above.  Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.  Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.

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Inside The Story

Asset Strategy Advisors

About Joe Palmisano

Joe Palmisano is Editorial Director for Connect Money, where he brings nearly three decades experience of market insights as a financial journalist, analyst and senior portfolio manager for leading financial publications, advisory firms, and hedge funds. In his role as Editorial Director, Joe is responsible for the selection of content and creation of daily business news covering the financial markets, including Alternative Assets, Direct Investment and Financial Advisory services. Before joining Connect Money, Joe was a financial journalist for the Wall Street Journal, regularly publishing feature stories and trend pieces on the foreign exchange, global fixed income and equity markets. Joe parlayed his experience as a financial journalist into roles as a Senior Research Analyst and Portfolio Manager, writing daily and weekly market analysis and managing a FX and US equity portfolio. Joe was also a contributing writer for industry magazines and publications, including SFO Magazine and the CMT Association. Joe earned a B.S.B.A. in Finance from The American University. He holds the Chartered Market Technician (CMT) designation and is a member of the CFA Institute.

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