Let's Talk Alts
Insightful conversations on Alternative Investments
Join Brian Partridge, head of Investment Solutions Group Specialists for Merrill and Bank of America Private Bank, as he interviews industry thought leaders in this ongoing, informative video series about Alternative Investments.
BRIAN PARTRIDGE: Welcome to Let's Talk Alts. I'm Brian Partridge, Head of Investment Solutions Group Specialists for Merrill and Bank of America Private Bank. Today we're talking with John McCarthy, Starwood Real Estate Income Trust. Starwood is one of the world's leading private real estate investment firms. Thank you for joining us, John.
JOHN MCCARTHY: Thank you, Brian.
BRIAN PARTRIDGE: So let's start with the basics of real estate. So many investors are somewhat familiar with real estate investing. Can you talk a little bit about the asset class and why it's considered an alternative investment?
JOHN MCCARTHY: First off, there's a concept of a 60/40 portfolio, which is comprised of 60% of equities and 40% of fixed income. And over the years, there's been more sophistication in investing. And that model has been challenged a little bit, and there's been some times where it's been challenging for that model to hold up. 2022 is a great example. it's come under pressure, both fixed income and equities you know, struggle to have a positive return. So, investors more and more we're looking for alternative investments, investments that can help bring some stability and some income to a portfolio, and one of those alternatives is real estate.
BRIAN PARTRIDGE: So, when we talk about real estate investments, it is an alternative asst class, alternative to equities and fixed income and can help with that portfolio diversification. But there's different types of real estate.
JOHN MCCARTHY: There are different types.
BRIAN PARTRIDGE: So public and private, can you talk about the differences between public and private real estate?
JOHN MCCARTHY: Sure, I mean, most people have probably heard about the primary way that you invest in public real estate, and it's called REITS, or real estate investment trusts. And they've been around for a long time, and they're very stable. They're usually lightly leveraged. Most of them trade on the New York Stock Exchange. And that's one way to invest in real estate. One of the aspects of REITS that investors have to be aware of is that they are subject to the capital markets, and capital markets go up and they go down, sometimes not really in connection with net asset value. So, you have to be able to accept some volatility. Another way to invest in real estate will be private real estate, through a private fund or a private vehicle, and one of the benefits of that is that you kind of take out that volatility that's not really connected with the value of the asset. You can get very strong cash flows and income, but you take out that volatility, and it's a different way to access real estate. So those are the two ways in which you might approach real estate.
BRIAN PARTRIDGE: So real estate can provide income as well as price appreciation depending on the underlying investments.
JOHN MCCARTHY: Absolutely, over time.
BRIAN PARTRIDGE: So, as you're adding real estate or considering adding real estate to a portfolio, what are some of the things that an investor should think about?
JOHN MCCARTHY: Well, I mean you think about the environment in which you're investing in. You think about investing in places that have strong job growth and population growth, because it's a proxy for demand for real estate. Ultimately real estate is worth more if you have demand by tenants who want the asset, rents can go up over time, and values go up. And all the economic factors you would think of play into that, you know, where in this particular asset and in the country do you have rent growth, population growth, and some of the attributes that help real estate be more valuable. It's like underwriting the economic background of what the investment will be in.
BRIAN PARTRIDGE: So, what are some of the different types of real estate investment options that an investor should consider?
JOHN MCCARTHY: Well, the industry has used three different ways to categorize real estate, and it's based upon expected return and the anticipated risk. So, it's a good way to look at real estate. And it's core real estate, value-add, and opportunistic. And just to give an example of-- so you know how it works, let's start with core real estate. If somebody goes out and buys, a literally brand-new apartment complex in a good part of town that just leased up to stabilize 95% occupancy, and it's very high quality, and somebody buys it just to manage rents, move them up in time, as inflation would dictate, that's not very much risk involved in that business plan. and that is a core investment. Very solid, very secure, and it's a core investment.
Flipping to the other end of the spectrum, to the extent that it was an opportunistic investment, it might be that somebody gets the ability, they get permitting, to build an apartment complex, and they have to make sure that they construct it on time and on budget, so they stay on time, and they have to lease it up at rents that they thought it would lease up at on a pro forma basis and one day they'll have a stabilized core property, but there's a lot more risk involved in taking that asset and building it till the point that it is producing those anticipated cashflows. That is more risk, that investment should have higher returns, and that's an opportunistic investment.
And then in the middle you have value-add, and value-add could be, as an example, let's use apartments again, it's a good quality apartment complex maybe it's 10, 15 years old. It's well-leased. And an investor wants to go in and upgrade kitchens and bathrooms, easy to do on a rolling basis. You can produce higher levels of income. Not that complicated, you know, a business plan, not that much risk. That would be an example of a value-add.
BRIAN PARTRIDGE: So, you talked a little bit about how the economic environment can impact the value of a real estate investment. What are the different kind of challenges or opportunities in real estate as the economic landscape evolves?
JOHN MCCARTHY: I mean, you have to look to see if interest rates are going up, because real estate is a good asset to finance. You can finance it at modest levels or higher if necessary. You have to be careful of too much leverage on an investment that might be opportunistic or aggressive because you want to make sure that you have stability. Then aberrations can happen. We had if you had a hotel portfolio, for example, a small hotel portfolio, and you were sitting there at nice occupancies, and they're functioning fine, when you went into the pandemic, which was a highly unexpected thing, all of a sudden, your occupancies are going to dissipate and that's going to change. And you're going to have to do your best to deal with that. So, what happens in the world can impact what happens with real estate. At that same time, what happened with a lot of multi-family locations was that all of a sudden when people became more mobile, and they can work in different places, all of a sudden places became more popular overnight, and the demand for that real estate increased based on changes in the economy and changes in what's going on in the US. So, you do have to function in the world around you and be aware of these factors that could impact the desirability of a piece of real estate.
BRIAN PARTRIDGE: So very helpful information. How should an investor think about the opportunities and the considerations that we've talked about? How should an investor best think about what is the right strategy for their portfolio?
JOHN MCCARTHY: Well, of course risk tolerance is a key factor in that, but working with an advisor to determine which type of real estate fits into your portfolio construction and then using them to find the right managers who have the right track record, who you can kind of underwrite the deliverability of returns from them, and get some help from an advisor, who understands those different aspects and understands the managers that would be available and what their strengths are and what their track records are, to take that data and take that input and make a high quality decision, it would probably be beneficial. We've already covered that real estate can have positive impacts on a portfolio. And so, to get an advisor's help to pick just the right one that fits in an investor's portfolio as you're constructing that would be beneficial.
BRIAN PARTRIDGE: Thank you, John.
JOHN MCCARTHY: My pleasure, thanks for having me.
BRIAN PARTRIDGE: We appreciate the overview on real estate investing and your insights into the potential opportunities these assets can add to a well-diversified portfolio. In summary, real estate investments can help to diversify an overall portfolio and dampen the impacts of volatility from equity and fixed income investments. Two, there are different investment options for you to consider as you think about your investment goals and your risk tolerance. And three, working with an advisor to help you think through those different options and what is most suitable and appropriate for your investment is a very thoughtful approach. That's it for this episode of Let's Talk Alts. Thank you for watching.
Important Information
Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your advisor.
When considering the appropriateness of mutual funds or Alternative Investments, please be aware that there are significant differences between these investments which will cause their investment portfolios, performance, tax treatment and other factors to differ. These differences include the types, availability and diversity of securities that can be purchased, economies of scale, regulations and other factors applicable to their management.
All investing involves risk including potential loss of principal.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Alternative Investments are speculative and involve a high degree of risk.
Real Estate Investment Trusts (“REITS”) involve a significant degree of risk and should be regarded as speculative. They are only made available to qualified investors under the terms of a private offering memorandum. Holdings in a REIT may be highly leveraged and, therefore, more sensitive to adverse business or financial developments. REITS are long term and unlikely to produce a realized return for investors for a number of years. Interests in a REIT are not transferable. The holdings may be illiquid--very thinly traded or assets for which no market exists. A REIT may use leverage, which even on a short-term basis can magnify increases or decreases in the value of the private equity investment. The business of identifying REIT opportunities is competitive, and there is no assurance that the REIT will be able to complete attractive investments or fully commit its capital. In addition, a REIT’s high fees and expenses may offset the fund's profits.
Real estate investments generally will be subject to various risks, including: (i) risks associated with both the domestic and international general economic climate; (ii) local real estate conditions; (iii) risks due to dependence on cash flow; (iv) risks and operating problems arising out of the maintenance or development of the property; (iv) changes in supply of, or demand for, competing properties in an area (as a result, for instance, of over-building); (vi) the financial condition of tenants, buyers and sellers of properties; (vii) changes in availability of debt financing; (viii) energy and supply shortages; (ix) changes in the tax, real estate, environmental and zoning laws and regulations; (x) various uninsured or uninsurable risks; and (xi) natural disasters. A fund’s real estate-related investments may involve a high degree of legal, financial and market risk, and there can be no assurance that a fund’s objectives will be realized or that there will be any return of capital. There is no assurance that there will be a ready market for the resale of real estate–related investments because investments may not be liquid.
Risk management, and diversification processes seek to mitigate, but cannot eliminate risk, nor do they imply low risk.
Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns in declining markets.
This video is provided for information purposes only and does not constitute an offer to purchase any security or investment or a solicitation of investment advice. An offer of interests in any particular investment can only be made pursuant to the relevant offering documents which contains important information concerning risk factors, performance and other material aspects of the investment and must be carefully read before any decision to invest is made.
This video is provided for informational purposes only by the Investment Solutions Group (ISG) Alternative Investments group and is not a publication of BofA Global Research. The views expressed are those of ISG, are developed in consultation with the Chief Investment Office (CIO) and are subject to change. While some of the information contained in this presentation may draw upon research by BofA Global Research, this material is neither reviewed nor approved by BofA Global Research.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Investment products:
Are Not FDIC Insured |
Are Not Bank Guaranteed |
May Lose Value |
Banking products are provided by Bank of America, N.A., and affiliated banks, Members FDIC, and wholly owned subsidiaries of Bank of America Corporation.
Investment products and services may be available through a relationship with Merrill Lynch Wealth Management or Bank of America Private Bank. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) which is a registered broker-dealer and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Certain Bank of America Private Bank associates are registered representatives with MLPF&S and may assist you with investment products and services provided through MLPF&S and other nonbank investment affiliates. Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly owned subsidiary of BofA Corp.
© 2023 Bank of America Corporation. All rights reserved. │ MAP5708076 - 05/28/2024
Let’s Talk Alts- Insightful Conversations on Alternative Investments Intro video
BRIAN PARTRIDGE: Welcome to Let's Talk Alts. I'm Brian Partridge, Head of Investment Solutions Specialists for Merrill and Bank of America Private Bank. In this educational video series, you'll find informative conversations with alternative investment thought leaders discussing all things Alts.
Whether you're just beginning to learn about this dynamic asset class and how to unlock its potential or are looking for deeper insights into current emerging and current investment trends and opportunities and where they fit into your investment profile, you'll find a range of interesting topics to help you better understand as you consider alternative strategies.
Thank you for watching. Now, Let's Talk Alts.
Important Information
Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your advisor.
When considering the appropriateness of mutual funds or Alternative Investments, please be aware that there are significant differences between these investments which will cause their investment portfolios, performance, tax treatment and other factors to differ. These differences include the types, availability and diversity of securities that can be purchased, economies of scale, regulations and other factors applicable to their management.
All investing involves risk including potential loss of principal.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Alternative Investments are speculative and involve a high degree of risk.
Risk management, and diversification processes seek to mitigate, but cannot eliminate risk, nor do they imply low risk.
Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns in declining markets.
This video is provided for information purposes only and does not constitute an offer to purchase any security or investment or a solicitation of investment advice. An offer of
interests in any particular investment can only be made pursuant to the relevant offering documents which contains important information concerning risk factors, performance and other material aspects of the investment and must be carefully read before any decision to invest is made.
This video is provided for informational purposes only by the Investment Solutions Group (ISG) Alternative Investments group and is not a publication of BofA Global Research. The views expressed are those of ISG, are developed in consultation with the ISG Chief Investment Office (CIO) and are subject to change. While some of the information contained in this presentation may draw upon research by BofA Global Research, this material is neither reviewed nor approved by BofA Global Research.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Investment products:
Are Not FDIC Insured |
Are Not Bank Guaranteed |
May Lose Value |
Investment products and services may be available through a relationship with Merrill Lynch Wealth Management or Bank of America Private Bank. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) which is a registered broker-dealer and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Certain Bank of America Private Bank associates are registered representatives with MLPF&S and may assist you with investment products and services provided through MLPF&S and other nonbank investment affiliates. Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly owned subsidiary of BofA Corp.
© 2023 Bank of America Corporation. All rights reserved. │ MAP5243679 │ 03/2023
Let’s Talk Alts- Insightful Conversations on Alternative Investments An introduction to Alternative Investments with Nancy Fahmy
BRIAN PARTRIDGE: Welcome to Let's Talk Alts. I'm Brian Partridge, Head of Investment Solutions Specialists at Merrill and Bank of America Private Bank. And today, we are talking with Nancy Fahmy, Head Investment Solutions Group for an introduction to Alternative Investments. Thanks for joining us, Nancy.
NANCY FAHMY: It's great to be here.
BRIAN PARTRIDGE: While many investors may have heard about Alternative Investments, they might not be familiar with them. So, let's start with the basics. What are Alternative Investments?
NANCY FAHMY: Alternative Investments refer to a broad set of investment strategies. They're really strategies outside of traditional investments, like stocks and bonds, that most investors are familiar with. They've got a couple of unique characteristics. Number one, you really don't tie Alternatives to a benchmark, like the S&P 500. Many managers in the Alternative space are allowed to do things that are somewhat unconstrained, which allow them to provide alternative sources of returns and alternative yields. In addition to that, they're less liquid, which also can be an advantage in certain market environments. It also allows them not to worry about daily liquidity, which can oftentimes constrain performance.
BRIAN PARTRIDGE: So, they have less liquidity than traditional investments, and there's also a broader opportunity set. So, it does create an opportunity for investors to think about the opportunities within their portfolios. Can you expand on how Alternative Investment strategies may help an overall portfolio?
NANCY FAHMY: Absolutely. Including Alternative Investments as a complement to traditional portfolios allows you to do a couple of things. Number one, their diversification benefits.
Because they're not following the public markets, the return streams can be differentiated, and that can complement a portfolio. In addition to that, enhanced returns or an enhanced yield. So, a lot of investors seek out Alternatives for the enhanced return that comes with illiquidity premium, giving up liquidity in exchange for that, and also alternative sources of yield, which a lot of investors are looking for these days. And lastly, to mitigate volatility.
Especially in a market environment where there's a lot of volatility, you can use it as a more consistent way to enhance returns within a broader portfolio.
BRIAN PARTRIDGE: Let's look at some different types of Alternative Investments. Most fall into three primary categories. The first is Hedge Funds. The second is Private Market Investments, which include private equity and private credit strategies. And the third is Real Assets. Also, Non-traditional Mutual Funds, which gives you access to other strategies that offer lower investment minimums and daily liquidity, which are available to all types of investors. So, Nancy, let's start with hedge funds.
NANCY FAHMY: Sure, so a lot of people think about hedge funds as being a single type of investment strategy. It's really a heterogeneous category. There are a lot of different types of
hedge fund strategies that really depends on what your investment goals are. What are you looking to achieve as an investor? For example, there are global macro strategies, equity long- short, and market-neutral strategies. The important thing is to really leverage an advisor to really help you understand the different types of hedge fund strategies and how to include them into a portfolio depending on your long-term goals. Hedge fund managers have a lot of tools that they can leverage outside of the tools that traditional investment managers, like mutual funds and ETF managers, can use.
BRIAN PARTRIDGE: So, there are a lot of different sub-strategies and options, even within the hedge fund space.
NANCY FAHMY: Absolutely.
BRIAN PARTRIDGE: Now let's talk about private investments and how these are different from public investments. And let's start with Private Equity.
NANCY FAHMY: So Private Equity simply refers to investment in private companies. And this is really an increasingly important category. There are way more private companies than there are public companies. By excluding private equity, you're really excluding a very significant amount of investable assets or investment portfolio companies. So Private Equity refers to the ability for a manager to invest in these private companies. The really unique thing about it is that they're patient capital. This is a long-term investment. They can deploy that capital over time. They can make improvements in these portfolio companies. They've got control to buy and improve the company and then also to sell at the appropriate time and really provide that value to individual investors.
BRIAN PARTRIDGE: A lot of value over public equities.
NANCY FAHMY: Absolutely.
BRIAN PARTRIDGE: So, what about private credit and direct lending strategies?
NANCY FAHMY: Private credit and direct lending is a growing category largely because many of these middle-market companies don't have access to the large banks, the credit that the large banks are providing. They're really leveraging these private lenders. And this is a broad category that individual investors can get access to, providing, again, enhanced return beyond traditional fixed-income investments or public fixed-income investments and enhanced yield to the individual investor. Again, keep in mind the illiquidity nature of these types of investments.
BRIAN PARTRIDGE: And then finally, Real Assets. Real Assets consists of real estate, infrastructure, commodities, natural resources, can you talk a little bit about the Real Asset class?
NANCY FAHMY: Sure, Real Assets refer to anything you can touch. Properties, buildings, and real estate. Real Assets is an important category because you can invest in Real Assets in public markets, like leveraging public REITs, for example. But you may have unintended
consequences of experiencing public market volatility. By investing in Private Real Assets, you really have that same long-term time horizon, that same control in being able to buy the asset, lease the asset, improve the asset, and then sell it over time. So, it's a really important category, especially as a means for alternative yield. As well as in an environment where there's rising inflation, it could serve as an important inflation hedge.
BRIAN PARTRIDGE: So even in real estate, there's incremental value potentially in private real estate over public real estate investments?
NANCY FAHMY: Absolutely, as long as the investor can withstand that illiquidity.
BRIAN PARTRIDGE: We've talked a lot about benefits of Alternative Investments. What are some risk considerations that clients should think about?
NANCY FAHMY: Sure, so clients should absolutely think about their time horizon. Think about their liquidity needs as they invest in Alternative Investments. That's first and foremost.
Alternatives, again, are a very diverse set of investment strategies. But investors really need to think about, you know, the leverage, potentially, that's used in some of these underlying investments. There is no public Bloomberg for private market investing, so you need to also invest with a very experienced advisor or really have somebody help you source those managers that are really skilled at investing in the private markets and also utilizing some of these alternative strategies. It's a little bit less transparent than the public markets, and that's why it's important to invest with somebody that really has the experience in selecting the right type of managers for your portfolio.
BRIAN PARTRIDGE: So engaging in it with an advisor on the discussion of how to add alternative investments to a portfolio, and a lot of the considerations you've talked about is a good approach to embracing the asset class.
NANCY FAHMY: It's incredibly important to work with somebody experienced.
BRIAN PARTRIDGE: For investors who are comfortable with less liquidity than public investments, alternative investments can add a lot of benefit to an overall portfolio. How should an investor think on adding alternative investments to a portfolio?
NANCY FAHMY: For investors comfortable with the illiquidity, they should really consider a core and consistent allocation to alternative investments to complement the traditional part of their portfolio that will serve them in multiple market environments. Where perhaps there's market volatility, it could help to dampen the downside. It could also help to provide alternative sources of yield or enhanced returns to the portfolio. Investors really should work with an advisor to help guide them based on their goals, their liquidity needs, their risk tolerance, as well as their time horizon.
BRIAN PARTRIDGE: Thanks, Nancy. Alternative Investments offer a broad set of benefits. One, they add further diversification to an investor's portfolio. Two, they can add return or yield enhancements to overall portfolios. And importantly, three, they help lower overall volatility of a portfolio. That's it for this episode of Let's Talk Alts. Thank you for watching.
Important Information
Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your advisor.
When considering the appropriateness of mutual funds or Alternative Investments, please be aware that there are significant differences between these investments which will cause their investment portfolios, performance, tax treatment and other factors to differ. These differences include the types, availability and diversity of securities that can be purchased, economies of scale, regulations and other factors applicable to their management.
All investing involves risk including potential loss of principal.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Alternative Investments are speculative and involve a high degree of risk.
Hedge funds can result in higher return potential but also higher loss potential. It is required that any prospective investor must meet certain qualifications and acknowledge they understand the risks associated with investing in hedge funds. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales which can magnify potential losses or gains. Restrictions exist on the ability to redeem units in a hedge fund. Hedge funds are speculative and involve a high degree of risk.
Investments in private equity involve a high degree of risk and therefore should only be undertaken by qualified investors whose financial resources are sufficient to enable them to assume these risks and to bear the loss of all or part of their investment. Investments in private equity include significant risks not otherwise present in public market investments. Furthermore, private equity investors are afforded less regulatory protections than investors in registered public securities.
Non-Traditional Mutual Funds are subject to significant investment and strategy restrictions not imposed on unregistered hedge funds. They may be an imperfect fit as a hedge fund substitute but may provide diversification benefits to the overall portfolio. Non-traditional mutual funds have been vetted by CIO and determined to have certain strategy and historical performance characteristics which qualify them for inclusion as a reasonable proxy for the indicated hedge fund strategy. While Non-Traditional Mutual Funds may not be subject to the full eligibility requirements that apply to hedge funds, they may not be in the best interest of
all clients, given their ability to engage in alternative strategies within the parameters of the Investment Company Act of 1940.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
Risk management, and diversification processes seek to mitigate, but cannot eliminate risk, nor do they imply low risk.
Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns in declining markets.
This video is provided for information purposes only and does not constitute an offer to purchase any security or investment or a solicitation of investment advice. An offer of interests in any particular investment can only be made pursuant to the relevant offering documents which contains important information concerning risk factors, performance and other material aspects of the investment and must be carefully read before any decision to invest is made.
This video is provided for informational purposes only by the Investment Solutions Group (ISG) Alternative Investments group and is not a publication of BofA Global Research. The views expressed are those of ISG, are developed in consultation with the Chief Investment Office (CIO) and are subject to change. While some of the information contained in this presentation may draw upon research by BofA Global Research, this material is neither reviewed nor approved by BofA Global Research.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Investment products:
Are Not FDIC Insured |
Are Not Bank Guaranteed |
May Lose Value |
Investment products and services may be available through a relationship with Merrill Lynch Wealth Management or Bank of America Private Bank. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) which is a registered broker-dealer and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
Certain Bank of America Private Bank associates are registered representatives with MLPF&S and may assist you with investment products and services provided through MLPF&S and other nonbank investment affiliates. Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly owned subsidiary of BofA Corp.
© 2023 Bank of America Corporation. All rights reserved. │ MAP5368163 │ 03/2023
Let’s Talk Alts- Insightful Conversations on Alternative Investments
Incorporating Alternative Investments into a Portfolio with Dominick Carlino
BRIAN PARTRIDGE: Welcome to Let's Talk Alts. I'm Brian Partridge, Head of Investment Solutions Group Specialists for Merrill and Bank of America Private Bank. Today, we are talking with Dominick Carlino, Head of Alternative Investments Distribution. He will be offering his insights into where alternative investments may fit into a portfolio. Thank you for joining us, Dominick.
DOMINICK CARLINO: Good to be here, Brian. Thank you.
BRIAN PARTRIDGE: The traditional portfolio, which is comprised of stocks and fixed income, has been a staple of the industry for a long time. However, recent research shows that maybe investors should be kind of looking at how you can incorporate non-traditional asset classes, like alternative investments, to help balance the risk-reward of a portfolio and better diversify. How's that evolution playing out today?
DOMINICK CARLINO: We're certainly seeing a lot of interest in alternative investments, Brian. There's increasing recognition amongst investors, both institutional investors and individual investors, that Alternative Investments can play a complement to traditional assets and be a return enhancer and diversifier within a diversified portfolio. Understanding that it brings with it opportunities but also a unique set of risks as well.
BRIAN PARTRIDGE: So what does a more effectively balanced portfolio look like in this environment?
DOMINICK CARLINO: Well, I think one where there's sort of recognition that different assets and strategies perform well and present different risks in different market environments. So understanding how traditional investments and alternative investments, side by side with them, behave in different market environments will really help you lead to a more diversified and optimized portfolio.
BRIAN PARTRIDGE: That's a really important point. Can you expand on how alternative investments can complement traditional asset classes, like stocks and fixed income?
DOMINICK CARLINO: There are a number of categories within Alternative Investments. Some are more public-market focused. Some are more private-market focused. Some are within what we call "Hedge Funds." Some of them, Private Equity Funds and some of them, Real
Asset Funds. And again, each of those provides for different outcomes, different complements, and represent different risk profiles as well. But they're intended to provide different impacts to your portfolio. So again, some are more return-enhancing, some are more diversifying, and some are more capital preserving and defensive depending on what your financial goals are and your intended desired outcome.
BRIAN PARTRIDGE: So there's choice for investors as they think about alternative investments in their portfolio. How do these different choices fit into an overall asset allocation strategy to deliver diversification?
DOMINICK CARLINO: Yeah, certain choices provide more growth orientation and growth outcomes and are more return-seeking. Some are more diversifying in their orientations. They're intended to be complements to traditional stock and bond holdings. And then others still are meant to be more safety-seeking, principal-protecting, and limiting downside in the market.
BRIAN PARTRIDGE: So within the different choices, what about real assets?
DOMINICK CARLINO: Real Assets is a broad category. The most prominent strategy within it is real estate. So real estate as a strategy could be expressed in traditional or alternative investment strategies. And what they seek to do is provide a good total return over time. In some cases, they'll provide income as well. And in terms of risk mitigation, they seek to mitigate inflation risk and provide for diversification, relative to traditional stocks and bonds.
BRIAN PARTRIDGE: So you've talked about the different types of underlying strategies within alternative investments and some of those strategies have different objectives depending on your risk profile as an investor. How can an individual investor understand the right way to put together the different choices into an overall asset allocation strategy to help achieve their financial objective?
DOMINICK CARLINO: It's a great question because there are a lot of choices, and often folks need help to make sense of all of them. And the different choices, again, provide for different outcomes, different opportunities, different risks. So I think it's important to partner with an advisor to help you navigate those options.
BRIAN PARTRIDGE: Dominick, you mentioned a number of different strategies within the alternative investment asset class that help build diversification into a client's portfolio. How does an investor actually invest in some of these strategies within their portfolio?
DOMINICK CARLINO: Well, there's a wide set of options, Brian, that are suitable for different types of investors based on their return objectives, their risk sensitivities, as well as their liquidity profiles. The most broadly available one is non-traditional mutual funds or liquid alternatives, which are available to all types of investors. On the other end of the spectrum, there are private placements, which are limited by qualification status which is generally tied to your wealth level. And those are generally less liquid in their orientation. There are other options in between. But suffice to say, there are a number of ways to access.
BRIAN PARTRIDGE: Very insightful commentary, Dominick. Thank you so much for joining us.
So as you heard here today, Alternative Investments are a great complement to a traditional portfolio and really help you to build more diversification and better risk-reward into your portfolio. Dominick talked about a number of ways that investors can access these investments through different vehicles, and, most importantly, working with an advisor to help you understand how to build the right portfolio to meet your objectives and needs.
Important Information
When considering the appropriateness of mutual funds or Alternative Investments, please be aware that there are significant differences between these investments which will cause their investment portfolios, performance, tax treatment and other factors to differ. These differences include the types, availability and diversity of securities that can be purchased, economies of scale, regulations and other factors applicable to their management.
All investing involves risk including potential loss of principal.
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Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Alternative Investments are speculative and involve a high degree of risk.
Risk management, and diversification processes seek to mitigate, but cannot eliminate risk, nor do they imply low risk.
Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns in declining markets.
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This video is provided for informational purposes only by the Investment Solutions Group (ISG) Alternative Investments group and is not a publication of BofA Global Research. The views expressed are those of ISG, are developed in consultation with the ISG Chief Investment Office (CIO) and are subject to change. While some of the information contained in this presentation may draw upon research by BofA Global Research, this material is neither reviewed nor approved by BofA Global Research.
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Important Disclosures
Opinions are as of the date of the videos and are subject to change.
Each video contains its own additional and important information and disclosures.
Alternative Investments are speculative and involve a high degree of risk.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.
When considering the appropriateness of mutual funds or Alternative Investments, please be aware that there are significant differences between these investments which will cause their investment portfolios, performance, tax treatment and other factors to differ. These differences include the types, availability and diversity of securities that can be purchased, economies of scale, regulations and other factors applicable to their management.