More doors are opening for retail investors to access alternative assets. In June, the US Labor Department loosened rules to allow defined contribution plans such as 401(k)s to invest in alternative asset funds like private credit and venture capital through target date funds on the sponsor’s platform.
The US Securities and Exchange Commission last June issued a concept release soliciting industry comment on the idea of expanding private market access to retail investors while maintaining investor protections. Yieldstreet, a digital wealth manager, last week added a private credit vertical to its menu of alternative offerings for qualified investors. Private Debt Investor spoke with Eric Mogelof, a managing director and head of Pimco’s US Global Wealth Management business, about developments in this growing area. Pimco’s alternative investment portfolio is more than $36 billion.
What has been the trend in retail investing in alternative assets?
We have absolutely seen a continuation of individual investors allocating more money to alternative strategies through financial advisors.
How has the coronavirus pandemic affected those investments?
The crisis has accelerated the trend, with a focus recently on alternative credit.
What is the typical allocation of retail investors to alternative assets?
With individuals, it’s a couple of percent, while the institutional space is much higher.
Talk about Pimco’s offerings in this space.
We’ve been working on democratising access to these alternative solutions to the wealth market. There are two ways. One is utilizing digital technology to make our solutions available to a broader set of investors through registered investment advisors and other intermediaries. The other is to use innovative investment vehicles.
Traditionally, most institutional investors have used the limited partner structures and drawdown vehicles, but for many individual investors this structure may not be appropriate. Yet those investors want to capture the unique premium in private credit, so we are using interval funds, which are liquidity protected vehicles under the 1940 Investment Company Act [These vehicles periodically offer to buy back shares from shareholders, as they are closed-end funds that don’t trade on a secondary market].
How has the coronavirus pandemic affected your focus?
We have been looking more at strategies that capitalise on dislocations, or that are oriented toward capital solutions. We’re looking at broader credit strategies that look globally across the public and private markets. It is a unique time, and more investors are open to trying to capitalise on some of these unique liquidity premiums in the portfolios. It is a good time to enhance returns and diversify risk; to be opportunistic and capture an attractive risk premium.
How was Pimco positioned before the coronavirus struck?
Interestingly enough, coming into this crisis we had a much more defensive posture. We truly believed that valuations were getting pretty tight in the credit markets, and we also had some real concerns about the direct lending market. We expect that with more stress in the credit markets, there will be some really unique opportunities in lots of different parts of the credit markets beyond direct lending.
We favour broader mandates or strategies to look across the credit markets, for instance in corporate credit, consumer credit, housing-related and specialty finance.
What about business development companies?
The manager really matters in the alternative credit space. These investment vehicles are sophisticated, and often incorporate leverage. We believe that if you’re going to invest in the alternative space you have to do it with a manager who has a strong background in risk management – managing operational risk. We have a very robust investment process and investment team, operating in the credit markets for the past 45-50 years, with 60 or 70 credit research analysts across the globe. This is one area where managers matter. If you look at historical performance, there’s a big difference between top-quartile and bottom-quartile managers.
What about the broader opportunities for individuals to access the private markets through online platforms?
Online platforms are a separate universe from technology that facilitates advisors adding alternative investment solutions to client portfolios. Where individual investors can directly allocate to alternatives, it’s really important for them to understand the risk, and to be careful. Financial advisors are trained and educated to support clients. We partner with a technology firm that enables much broader access to Pimco’s alternative solutions for a large number of financial advisors. This lowers the minimum investment size and facilitates the investment process, which has historically been very cumbersome. We feel great about the technology that’s come up through that part of market. My overarching comment is that for many individual investors, alternatives can potentially be a valuable part of portfolio construction, whether working with a financial advisor or building your own portfolio.