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Contributors

Elyse Ausenbaugh

Global Investment Strategist

Sean Flynn

Head of Alternatives for Wealth Management

 

We all have different motivations for why we invest. Some individuals hope to generate enough income to sustain their lifestyles. Others may be seeking ways to grow their wealth over decades, whether to fund a legacy for generations or a comfortable retirement. Financial goals are unique for every individual.

That said, many of the challenges facing today’s investors are universal: The revival of inflation calls for the pursuit of higher expected returns to grow purchasing power over time. Alpha opportunities have generally become harder to find in “traditional” stocks and bonds, and last year’s selloff in bonds left investors seeking more reliable portfolio factors. Also, the appetite for steady income generation is ever-present.

Alternative investments can help investors solve for many of these challenges. Below, we explore three primary roles they can play in portfolios: access to broader opportunity sets, enhanced diversification and premium income generation potential.

Diversify your portfolio with alternative investments

Now may be an opportune time to look beyond more “traditional” stocks and bonds. Consider partnering with your J.P. Morgan Advisor to learn more about how alternatives can fit into your financial plan.

Learn more

 

1. Access to a broader opportunity set of long-term growth potential

Historically, equities have enabled investors to grow their capital over time. However, we have seen a 26% decline in the number of publicly traded companies since 2000,1 and there are now over 32x more private companies than public companies with more than 100 employees.2 Limiting your investment approach to public markets means missing out on the vast opportunity set in private markets.

Private equity managers often take a hands-on approach, driving operational improvements in portfolio companies. With this expanded access and more comprehensive toolkit, private equity has consistently outperformed global public equity markets by 4–12% annually (see chart below).

This bar chart displaying historical annualized returns of the global buyout and growth equity index versus MSCI All Country World public market equivalent index.

Historical annualized returns of Global Buyout & Growth Equity Index vs. MSCI ACWI PME


Visual chart displaying historical annualized returns of the global buyout and growth equity index versus MSCI All Country World public market equivalent index.

 

5-year:

Global Buyout & Growth Equity Index (net): 15.9%

MSCI ACWI PME: 10.3%

 

10-year:

Global Buyout & Growth Equity Index (net): 15.3%

MSCI ACWI PME: 11.2%

 

15-year

Global Buyout & Growth Equity Index (net): 11.4%

MSCI ACWI PME: 8.4%

 

20-year:

Global Buyout & Growth Equity Index (net): 14.5%

MSCI ACWI PME: 9.2%

 

This bar chart displaying historical annualized returns of the global buyout and growth equity index versus MSCI All Country World public market equivalent index.

 

Source: The Burgiss Group LLC, Bloomberg Finance LP as of June 30, 2023. Data for buyout and growth equity performance represents the net of fees pooled end-to-end returns based on data compiled from 2,890 global (U.S. and ex-U.S.) buyout and growth equity funds tracked by The Burgiss Group LLC. Past performance is not indicative of future results. It is not possible to invest directly in an index. The historical returns reflected above are included solely for the purpose of contrasting returns of buyout and growth equity funds with the MSCI ACWI Index over certain time periods. The historical returns are not intended to, and do not, reflect the historical performance of investment opportunities in private equity (i.e., core private equity, growth equity and venture capital), private credit and real asset funds offered by J.P. Morgan Private Bank to J.P. Morgan Private Bank clients during Vintage 2024’s Commitment Period (as defined hereafter) and, accordingly, should not be interpreted as indicative of the future performance of Vintage 2024. See “Definition of Indices” on pages 59–60 for further information.

 

2. Portfolio diversification for when the going gets tough

Portfolio diversification can come in many forms. Regarding private credit, higher base rates, we believe wider spreads and protective loan covenants could support attractive private credit returns into 2024 and beyond, on an absolute basis and relative to public credit and equity markets. We also expect to see transaction activity fueled by an uptick in defaults & distressed exchanges in the leveraged loan & high yield bond markets and exacerbated by a growing debt maturity wall.

For further diversification, hedge funds can be used as a tool in portfolios. Hedge funds may help reduce portfolio volatility by using hedging strategies and accessing niche exposures that may generate uncorrelated return streams. Therefore, hedge funds may help a portfolio to compound more efficiently.

Real assets, too, can act as powerful diversifiers in a portfolio. Infrastructure assets, in particular, can offer exposure to essential services with resilient demand and inflation-linked revenue. Similarly, real estate tends to offer historically low correlation to public markets, including publicly traded REITs. 

3. Attractive yield generation

J.P. Morgan’s 2024 Long-Term Capital Market Assumptions estimate that total returns in U.S. investment grade bonds could average 4.6% per year over a 10-year investment horizon, but with an average inflation assumption of 2.4%, the real return prospects look less compelling.3

To boot, as the size of the average high yield borrower has grown, many borrowers are too small to tap into public credit markets; conversely, larger companies may not want to risk the uncertainty or lengthy processes that come with accessing traditional capital markets. Private lenders can fill this financing gap, offering their investors the chance to collect a premium for providing capital where it’s scarce.

This bar chart depicting the historical asset class yields of Direct Lending as an asset class.

Asset class yields

 

Visual depicting the historical asset class yields of Direct Lending as an asset class in comparison to U.S. high yield, Commercial real estate (CRE) mezzanine yield, U.S. investment grade, Commercial mortgage loans-senior and U.S. 10-year Treasury yield, respectively.

 

  • Direct lending (alternatives): 11.6%
  • U.S. High Yield (fixed income): 8.4%
  • Commercial Real Estate - Mezz (alternatives): 8.1%
  • U.S. Investment Grade (fixed income): 5.6%
  • Commercial Mortgage Loans-Senior (alternatives): 4.4%
  • U.S. 10-Year Treasury Yield (fixed income): 4.4%

 

This bar chart depicting the historical asset class yields of Direct Lending as an asset class.

 

Source: BAML, Bloomberg Finance LP, Clarkson, Cliffwater, Drewry Maritime Consultants, Federal Reserve, FTSE, MSCI, NCREIF, FactSet, Wells Fargo J.P. Morgan Asset Management. *Fixed income yields are as of 11/30/2023. Alternative yields are as of 9/30/2023 and CRE – Mezz, which is as of 10/31/2023. CML – Senior: Gilberto-Levy Performance Aggregate Index (unlevered). Mezzanine commercial mortgage loans yield is derived from a J.P. Morgan Survey and U.S. Treasuries of a similar duration. Direct Lending: Cliffwater Direct Lending Index; U.S. High Yield: Bloomberg US Aggregate Corporate High Yield; U.S. 10-year: 10-year U.S. Treasury yield; Data is based on availability as of November 30, 2023. Past performance is not indicative of future results.

 

An additional approach to seeking attractive yield generation can potentially be the implementation of infrastructure. Infrastructure has continued to be an attractive source of income. The long-term lease structures of core real assets may provide strong, predictable cash flow to the return stream. While the total needed spend globally continues to increase, we look to private markets to fill the gap in public spending.

This bar graphs shows the total composition of average annual infrastructure needs.

Global infrastructure investment

 

Bar graph showing the total composition of average annual infrastructure needs. Total is $3.6 trillion USD and composed of $0.9 trillion in roads, $0.4 trillion in rails, $0.1 trillion in ports, $0.1 trillion in airports, $1.1 trillion in power, $0.5 trillion in water, and $0.5 trillion in telecom.

This bar graphs shows the total composition of average annual infrastructure needs.

Source: McKinsey Global Institute, J.P. Morgan Asset Management. Data are based on availability as of November 30, 2023.

 

We can help

Those with the desire – or need – to overcome today’s investment challenges would be remiss not to consider alternative investments.

As always – but especially in alternatives – due diligence and selectivity are essential, as performance can vary widely.4 It’s important to remember that investing in alternatives often involves a greater degree of risk than investing in traditional assets. For instance, they are typically not registered with regulators and may therefore offer limited information to investors. Additionally, alternatives often carry a risk of illiquidity as a result of restrictions on transfer and lack of a secondary trading market.

Many investors choose to partner with us to narrow the alternative investment universe because of our rigorous scrutiny of managers. Our in-house team conducts on-site visits, examining the structure, operations, incentives and individuals on a manager’s team. 

As one of the largest alternatives platforms, we set out to continually bring a carefully curated set of high-conviction opportunities to help you realize your goals.

If you’re interested in learning more about our alternative investment platform, the latest opportunities, and how they may fit in your financial plan, speak with your J.P. Morgan team.

Connect with a Wealth Advisor

Our Wealth Advisors begin by getting to know you personally. To get started, tell us about your needs and we’ll reach out to you.

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References

1.

Hamilton Lane, “A Guide to Private Markets,” as of September 2021 for Year 2000. The World Bank, as of November 2023 for Year 2023.

2.

Bureau of Labor Statistics, “Number of Business Establishments by Size of Establishment in Selected Private Industries.” Number of private companies is comprised of U.S. business establishments with 100 or more employees in natural resources and mining, construction, manufacturing, trade, transportation and utilities, information, financial activities, professional and business services, education and health services, leisure and hospitality, and other services as of March 2023. Number of public companies is the sum of companies listed on NYSE and NASDAQ, as of November 2023.

3.

J.P. Morgan Asset Management’s “2024 Long-Term Capital Market Assumptions”. (December 2023).

4.

Top-and-bottom-quartile private equity managers, for example, have had, on average, a 21% performance differential. In hedge funds, the difference is 14% between top-quartile and bottom-quartile performing managers. Sources: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. Data as of November 30, 2022. Manager dispersion for hedge funds is based on annual returns over a 10-year period ending 3Q 2022. Global private equity is represented by the 10-year horizon internal rate of return (IRR) ending 3Q 2023. Past performance is no guarantee of future results. It is not possible to invest in an index.

IMPORTANT INFORMATION

This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.  

Investing in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.

The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,841 constituents, the index covers approximately 85% of the global investable equity opportunity set.

The Cliffwater Direct Lending Index (CLDI), an index of private middle market loans launched in 2015 and reconstructed back to 2004, was created to measure private loan performance and better understand its investment characteristics. The CDLI was the first published index tracking the direct lending market and currently covers about 14,800 directly originated middle market loans totaling $315 billion.

The Bloomberg U.S. Corporate High Yield Index measures the performance of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds, including corporate bonds, fixed-rate bullet, puttable, and callable bonds, SEC Rule 144A securities, Original issue zeroes, Pay-in-kind (PIK) bonds, Fixed-rate and fixed-to-floating capital securities.

The S&P U.S. Treasury Bond Current 10-Year Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note or bond.

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. 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. The value of the investment may fall as well as rise and investors may get back less than they invested.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy . As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum. Securities are made available through J.P. Morgan Securities.

As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

Diversification and asset allocation does not ensure a profit or protect against loss.

Real Estate Investments Trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

JPMAM Long-Term Capital Market Assumptions

Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.

GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.

NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

Legal Entity and Regulatory Information.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.

J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document.  JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.

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To learn more about J. P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products.

This website is for informational purposes only, and not an offer, recommendation or solicitation of any product, strategy service or transaction. Any views, strategies or products discussed on this site may not be appropriate or suitable for all individuals and are subject to risks. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. 

This website provides information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC ("JPMS"). When JPMS acts as a broker-dealer, a client's relationship with us and our duties to the client will be different in some important ways than a client's relationship with us and our duties to the client when we are acting as an investment advisor. A client should carefully read the agreements and disclosures received (including our Form ADV disclosure brochure, if and when applicable) in connection with our provision of services for important information about the capacity in which we will be acting.

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J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Please read additional Important Information in conjunction with these pages.

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