Global turmoil has advisors touting alts’ diversification benefits

As advisor sentiment returned to negative territory in June over concerns about the global economy, financial planners warmed to alternative investments as a way to diversify client portfolios.

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Advisor confidence fell in June to a score of minus-7 on a scale from minus-100 (most pessimistic) to 100 (most optimistic), according to Financial Planning’s latest Financial Advisor Confidence Outlook (FACO) survey. That score — compiled from surveys of 195 advisors in June — was down from 7 in May, when confidence recovered from negative territory for the first time in several months.

As in other recent FACO surveys when advisor confidence was negative, respondents to the latest poll expressed the most concern about the global economic system. The continuing conflict in Iran and the effect the related shutdown of the Straits of Hormuz is having on the price of gas and other commodities were cited by many advisors in anonymous comments submitted alongside their survey responses.

“I think the uncertainty of the market and the war [in] Iran is causing a lot of fear,” one respondent wrote.

Other survey takers cited concerns about domestic policies, such as perceived political dysfunction and uncertainty about whether interest rates would be raised to combat inflation. One respondent cited “higher interest rates and uncertainty about future rate cuts,” as a top concern.

Advisors looking to alternative investments for diversification

Alternative investments such as private equity, credit and real estate gained favor as ways to diversify clients’ portfolios. Twenty-seven percent of the respondents to the latest FACO survey said they would recommend their clients put more money into alts in the coming month. 

Scott Bishop, a partner and managing director at Presidio Wealth Partners in Houston, said the best way to prepare client portfolios for uncertainty is to make sure they are diversified. He said stocks, bonds and other traditional investments can become “correlated” — meaning they move in the same direction rather than offset each other — in times of economic stress.

“For many high net worth investors, true diversification increasingly includes carefully selected private investments such as private real estate, private equity, and private credit alongside traditional public market holdings,” Bishop said.

Private credit: Advisors are all over the place on its risks

Concerns have swirled in recent months around private credit, which generally involves loans made to nonpublicly traded companies outside the regular banking system. The anxieties grew particularly strong after large asset managers like Blue Owl and BlackRock decided to restrict investors’ ability to pull money out of some of their premier private-credit funds. 

Respondents to the latest FACO survey said misconceptions about private credit abound, although they often disagreed about what exactly those misconceptions were. One respondent said anonymously, for instance, that many investors mistakenly think that private credit is “more risky than traditional investments.” That was seemingly contradicted by another respondent who said, “I don’t think clients understand the risk. And liquidity issues.”

Meanwhile, advisors in the latest FACO survey again expressed plans to recommend clients invest more in domestic and foreign stocks and bonds and debt-based securities. Alternative assets, meanwhile, rose in respondents’ regard.

Third-five percent of the advisors in the latest survey said they direct their clients to domestic equities (up from 33% in May), 32% favored foreign equities (the same as in May) and 30% favored bonds and other forms of debt (up from 25%). 

Advisors more upbeat on general economy, not on government policy

Despite advisor confidence falling in the latest FACO survey, views on the general economy improved slightly from a score of 27 in May to 28 in June. Respondents were pessimistic, though, about both government policy, with a score falling from 16 to 9 in June, and the global economic system, with its score falling from minus-38 to minus-51 in June.

Respondents also turned slightly more pessimistic about the performance of their own practice, with their amalgamated scores falling from 39 to 24 in June. Their views on clients’ risk tolerance fell from a score of minus-3 to minus-10 in June, and their views on asset allocation from a score of minus-2 to minus-5.