2 June 2023 - Archived

Alts Angle: Rethinking retirement with alternative investments

After a challenging 2022, many advisors and investors began to question their traditional retirement approach to investing. Tony Davidow, Senior Alternative Investment Strategist with Franklin Templeton Institute, illustrates the potential impact of adding alternative investments to pursue growth and income—as well as seek to dampen volatility—during the accumulation and distribution phases of retirement.

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CONTRIBUTORS

Tony Davidow, CIMA®

Senior Alternatives Investment Strategist
Franklin Templeton Institute

In 2022, stocks and bonds were both down double-digits for the year. According to Callan Associates, there have been only two other years since 1926 when both stocks and bonds have been negative—1931 and 1969.¹ Rising interest rates, record inflation, increased volatility, and double-digit negative returns for both stocks and bonds during 2022 left many advisors and investors wondering if they need to reconsider their retirement portfolios.

60% US Stock/40% US Bond Index Portfolio

1976–2022

Note: Stocks are represented by the MSCI USA Index, and bonds are represented by the Bloomberg US Aggregate Index. Total returns were considered. The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. The Bloomberg US Aggregate Bond Index represents intermediate-term investment-grade bonds traded in the United States.

Sources: FactSet, MSCI, Bloomberg. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.

We should be careful to separate the potential benefits of diversification and the 60/40 portfolio as a proxy. Unfortunately, as we experienced in 2022, there are periods of time where traditional investments are highly correlated to one another.

The roles and use of alternative investments

Pension plans have historically made significant allocations to alternative investments because of the various roles that they can play: pursuing growth and income, portfolio diversification and inflation hedging. However, up until recently, many of these investments were limited to institutions and family offices. Now through product innovation, these investments are more accessible to a broader group of investors, with more flexible features.

Overall, in our view, retirement plans should be modernized to reflect the broader set of tools available to pursue client goals. We believe advisors and investors should rethink their retirement strategies to respond to the changing market environment, the new products at their disposal, and the fact that many retirees are living longer, more productive lives through their retirement years. Alternative investments can play multiple roles in retirement portfolios, which include generating potential growth and income, seeking to dampen volatility, and/or helping to hedge the impact of inflation.

We believe advisors and investors should develop different approaches for the accumulation and decumulation phases of retirement, and should periodically revisit retirement plans to ensure they are on target for their objectives. If used appropriately, alternative investments may improve the likelihood of achieving the various goals through retirement planning phases.

Endnote

Source: Kloepfer, J. “Unprecedented Territory—and the Inherent Limits of Diversification,” Callan, May 13, 2022.

WHAT ARE THE RISKS?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.

Investments in alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.

This document is intended to be of general interest only. This document should not be construed as individual investment advice or offer or solicitation to buy, sell or hold any shares of fund. The information provided for any individual security mentioned is not a sufficient basis upon which to make an investment decision. Investments involves risks. Value of investments may go up as well as down and past performance is not an indicator or a guarantee of future performance. The investment returns are calculated on NAV to NAV basis, taking into account of reinvestments and capital gain or loss. The investment returns are denominated in stated currency, which may be a foreign currency other than USD and HKD (“other foreign currency”). US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar / other foreign currency exchange rate. Please refer to the offering documents for further details, including the risk factors.

The data, comments, opinions, estimates and other information contained herein may be subject to change without notice. There is no guarantee that an investment product will meet its objective and any forecasts expressed will be realized. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where an investment product invests in emerging markets, the risks can be greater than in developed markets. Where an investment product invests in derivative instruments, this entails specific risks that may increase the risk profile of the investment product. Where an investment product invests in a specific sector or geographical area, the returns may be more volatile than a more diversified investment product. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this document or any comment, opinion or estimate herein. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

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