Looking beyond liquidity: The rise of alternative assets in model portfolios

Managed accounts have undergone a consistent growth trajectory over the last decade, with the most recent SPDR ETFs/Investment Trends Managed Accounts Report finding that the proportion of advisers using managed accounts in Australia has reached a new high of 59 per cent.

Advisers using managed accounts allocate, on average, 71 per cent of clients’ total assets into these accounts.

Alongside this is an increasing appetite for alternative assets among investors – particularly high-net-worth investors – which another Investment Trends report found has led to platforms “acting swiftly” to expand their investment menu with private markets exposure.

According to State Street Global Advisors’ vice president and ETF model portfolio strategist, Sinead Schaffer, the inclusion of alternative assets within model portfolios is a growing theme that the firm is seeing offshore.

“Alternative assets are becoming a huge point of interest for US advisers to include within their model portfolio,” Schaffer told ifa.

“But what’s coming from this is addressing illiquidity issues. That’s creating some difficulties from an operational standpoint, but then it’s also creating considerations around retail investors – what’s their risk appetite? How much volatility can they take on?”

She added that there are also questions around the lack of daily pricing for private assets and how that interacts with the model portfolio space.

However, it is not just overseas that this theme is emerging, with Schaffer noting that State Street is already seeing this trend in Australia.

“One in five advisers actually will get private assets within their managed account and, across all managed account advisers, they want to see more private assets or less liquid assets sitting within those managed account structures,” she said.

“So, I think that that theme will continue through to Australia as well.”

She added that with managed accounts consistently evolving, there’s no reason to believe that there won’t be further shifts to place more alternative assets in the structure.

“When we started managed accounts or even model portfolios in Australia, exchange-traded funds weren’t used much in the early days,” Schaffer said.

“The idea is that they’re iterating and evolving with the needs of advisers and investors. For us, we just see it as that next iteration, that next stage of evolution within that portfolio, managed account journey.”

The data, she explained, is showing that there is simply a greater appetite to look at alternative investments, so model portfolios need to reflect that.

“Advisers in the US are asking that of providers, too. They would like to see more alternative assets sitting within their managed account,” Schaffer told ifa.

“The two things that we’re highlighting here is just that there are liquidity concerns, and how do you actually operationalise that within a structure that is transparent and easily traded?”

Beyond liquidity, she said the other barriers to including alternative assets in managed accounts largely come down to platform and technology advancements, including managing pricing.

“I think they’re still at the stage where this is still exploratory, and as we see that evolve, partners will work together to make sure that they can operationalise these efficiently and those transparent, efficient structures are still operating in that sense with the inclusion of private assets or less liquid assets.”