Private Alternatives: A Core Allocation
Blackstone’s long history of outperformance and capital protection extended in the third quarter even amid further market sell-offs. The S&P 500 dropped an additional 5%, bringing the year to date decline to 24%; the public REIT index was down 10% in the quarter and 28% year to date; and in debt markets, investment-grade and high-yield bonds declined 14-15% in the first nine months of the year.1
This year’s steep declines in stock and bond markets, the worst in roughly half a century, revealed cracks in the 60/40 portfolio, and have many rethinking portfolio allocations.2 Blackstone has long believed that alternative investments could serve as foundational building blocks for both institutional and private wealth portfolios, which may provide yield, inflation protection and a lower level of volatility.3 Sophisticated institutional investors typically maintain core private allocations of 15%-50%, tailored to their goals and parameters around return, liquidity and risk. Private wealth individuals have been increasing their allocations but remain well below these levels.4
For those who are rethinking the core portfolio, where to begin? Finding a steady hand in unsteady markets, for starters.
Blackstone can attribute its outperformance to its strategic investments in companies, properties and floating rate credit that are well positioned in a rising rate, inflationary environment, and sound management through an economic slowdown or recession. Most of the firm’s real estate investments are in sectors with supply-demand imbalances, where rent and therefore cash flow growth have stayed ahead of inflation. In both private equity and credit, the firm’s emphasis has been on sectors and companies with secular tailwinds and minimal input costs. While no investor can be completely immune to market and economic conditions, Blackstone has worked hard to create investment portfolios that are well positioned to weather the storm.
Even during the bull market that preceded this year’s volatility, allocations to alternatives such as real estate, private credit, and private equity could serve as core portfolio holdings, as indeed they have for decades for many institutional investors.5 On average, these alternative asset classes improved returns, dampened volatility, and increased the yield of a conventional stock-bond portfolio.6 We believe this is not a new phenomenon. Only the market environment and the rising attention to these asset classes qualify as new.
For those who are rethinking the core portfolio, where to begin? Finding a steady hand in unsteady markets, for starters – seeking managers who have the firepower, scale, rigorous underwriting standards and expertise in complex transactions to deploy capital in a way few others can. Those who have the staying power and have built durable capital structures to navigate through challenging economic and capital markets environments. Finding managers with extensive track records across multiple cycles. Working with managers who have garnered trust and built their reputation on that trust through their actions, who serve clients with excellence. This is all what Blackstone strives for, and it is what we believe the firm has delivered to its investors.
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At Blackstone and within our Private Wealth Solutions group, we are keepers of our brand and reputation and we understand its importance. We recently partnered with SHOOK Research© to better understand how top-ranked U.S. financial advisors who use alternatives are deploying these investments, why they use them, and what they plan for the future.7 When it comes to manager selection, reputation topped the survey (51%), more than double the second most important factor, performance (23%), and almost three times greater than product selection (18%). Overwhelmingly, these successful advisors, screened specifically because they use alternatives in their clients’ portfolios, report an intention to increase allocations in the future.
We are proud of the reputation Blackstone has built through its long-term track record. Our pride extends into the most recent period of market volatility, where we believe the firm’s flagship products turned in strong results at a very challenging time across most asset classes.
Accessing Private Markets with Blackstone
We are extremely grateful for your trust and confidence. We are here to work with you, providing institutional-quality investment solutions, education, and enduring partnership to meet your needs. We look forward to engaging with you.
Global Head of Private Wealth Solutions
Past performance is not indicative of future results. There can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses.
- Morningstar, as of 9/30/2022. Past performance is not necessarily indicative of future results, and there can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses. Public REITs are represented by the MSCI US REIT index. High-grade bonds are represented by the Bloomberg US Aggregate Bond index. High Yield bonds are represented by the Bloomberg US Corporate High Yield index.
- Morningstar as of 9/30/2022. As commonly used in the industry, the 60/40 portfolio is 60% allocated to the S&P 500 index and 40% is allocated to the Bloomberg US Aggregate Bond index. See also, “Alternatives Become Bigger Slice of Client Portfolios as Advisors Seek Shelter,” Investment News, April 22, 2022. Past performance is not necessarily indicative of future results, and there can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses.
- Blackstone products are subject to the risk of capital loss and investors may not get back the amount originally invested. There is no assurance that any Blackstone fund or product will effectively hedge inflation.
- NACUBO-TIAA Study of Endowments, as of June 30, 2021. Individual investor alternatives allocation based on Blackstone estimates.
- Based on average U.S. pension alternatives allocation of 26% and endowments, 51%. Source: Willis Towers Watson, “Global Pension Assets Study,” 2021; National Association of College and University Business Officers, “TIAA Study of Endowments,” 2021. For Endowments, the alternative asset allocation is for the Public College, University or System only and represented by allocations to Other equities (includes marketable alternatives, private equity and venture capital) and Real assets (includes TIPS, REITs, commodities/futures, publicly traded Master Limited Partnerships (MLPs), public traded natural resource equities, private energy and mining, and private agriculture and timber). Averages provided are dollar-weighted.
- Bloomberg, Morningstar, as of 3/31/2022 Based on a 60/40 Portfolio allocated 60% to the MSCI ACWI Index and 40% to the Bloomberg Global Aggregate Bond index. The yield on the 60/40 Portfolio was calculated using annualized MSCI Bloomberg, Morningstar, 3/31/2022. Based on a 60/40 Portfolio allocated 60% to the MSCI ACWI Index and 40% to the Bloomberg Global Aggregate Bond index. The yield on the 60/40 Portfolio was calculated using annualized MSCI ACWI Dividend Yield and the annualized Bloomberg Global Aggregate Bond Yield. The yield on the portfolio with a private market alternative allocation was calculated using the annualized MSCI ACWI Dividend Yield, the annualized Bloomberg Global Aggregate Bond Yield, annualized Cliffwater Direct Lending Index quarterly income, and the annualized NCREIF ODCE quarterly income. There is no yield from the private equity allocation, so private equity did not contribute to the annualized yield calculation. There can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses, or that alternative investments will generate higher yields than other investments. Annualized yields are as of March 31, 2022. Annualized returns and volatility are calculated based on the quarterly returns over the 5-year period from April 2017 to March 2022. The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions expressed reflect the current opinions of Blackstone as of the date hereof and are based on Blackstone’s opinions of the current market environment, which is subject to change. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.
- The survey and report was prepared by SHOOK Research and commissioned by Blackstone Inc. (“Blackstone”). Additionally, Blackstone participated in the review and preparation of the report. Any views or opinions expressed herein reflect solely the views of the advisors who were surveyed in connection with this survey and, in certain cases, SHOOK Research and/or Blackstone, and such views or opinions are subject to change without notice and may differ from opinions expressed by others. Neither SHOOK Research nor Blackstone has independently verified the information received from the advisors surveyed and no representation is made as to the accuracy of such information. Any projections, expectations or other forward-looking statements set forth herein are based on assumptions that are believed by SHOOK Research and Blackstone to be reasonable as of the date hereof. Neither SHOOK Research nor Blackstone has any obligation to update any such statements. Actual results are inherently uncertain and are subject to many factors, changing market conditions and general economic conditions, and may vary materially from the themes set forth herein. Nothing herein constitutes investment advice or recommendations and the report should not be relied upon as a basis for making an investment decision. “Top-Ranked” as defined by SHOOK Research. For more information on SHOOK’s ranking methodology, please see https://www.shookresearch.com/a-methodology.html
Index Definitions
The volatility and risk profile of the indices presented is likely to be materially different from that of BREIT and BCRED including those related to fees and expenses, liquidity, safety, and tax features. In addition, the indices employ different investment guidelines and criteria than BREIT and BCRED; as a result, the holdings in BREIT or BCRED, as applicable, may differ significantly from the holdings of the securities that comprise the indices. The performance of the indices has not been selected to represent an appropriate benchmark to compare to the performance of BREIT or BCRED, but rather is disclosed to allow for comparison of the performance of BREIT or BCRED, as applicable, to that of well-known and widely recognized indices.
Bloomberg Global Aggregate Bond Index: The index measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.
Bloomberg U.S. Aggregate Bond Index: The Bloomberg U.S. Aggregate Bond Index is an index of U.S. dollar-denominated, investment-grade U.S. corporate, government, and mortgage-backed securities.
Bloomberg U.S. Corporate High Yield Bond Index: The Bloomberg U.S. Corporate High Yield Bond Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market.
MSCI ACWI Index: The index measures the performance of the large and mid cap segments of all country markets. It is free float-adjusted market-capitalization weighted.
MSCI U.S. REIT Index: The MSCI U.S. REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. It represents about 99% of the U.S. REIT universe. The index is calculated with dividends reinvested on a daily basis.
S&P 500 Index: The index measures the performance of 500 widely held stocks in US equity market. Standard and Poor’s chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. It is market capitalization-weighted.
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All information is as of September 30, 2022 (the “Reporting Date”), unless otherwise indicated and may change materially in the future. Capitalized terms used herein but not otherwise defined have the meanings set forth in the Offering Documents. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon the merits of the investments described herein and any representation to the contrary is an offense.
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Russian Invasion of Ukraine. On February 24, 2022, Russian troops began a full-scale invasion of Ukraine and, as of the date of this Material, the countries remain in active armed conflict. Around the same time, the United States, the United Kingdom, the European Union, and several other nations announced a broad array of new or expanded sanctions, export controls, and other measures against Russia, Russia-backed separatist regions in Ukraine, and certain banks, companies, government officials, and other individuals in Russia and Belarus as well as a number of Russian individuals. The ongoing conflict and the rapidly evolving measures in response could be expected to have a negative impact on the economy and business activity globally (including in the countries in which the Fund invests), and therefore could adversely affect the performance of the Fund’s investments. The severity and duration of the conflict and its impact on global economic and market conditions are impossible to predict, and as a result, could present material uncertainty and risk with respect to the Fund and the performance of its investments and operations, and the ability of the Fund to achieve its investment objectives. Similar risks will exist to the extent that any portfolio entities, service providers, vendors or certain other parties have material operations or assets in Russia, Ukraine, Belarus, or the immediate surrounding areas.
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Trends. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.
