Discover how alternative investments can enhance your portfolio by mitigating risks and unlocking new opportunities for growth in today's volatile market. File photo.
By: Sanan Pillay
As the investment landscape evolves, alternative investments have proved to be a key strategy for mitigating risk, enhancing returns, and accessing opportunities beyond traditional asset classes. Whether through private equity, infrastructure, or private credit, these assets offer investors a chance to tap into markets that are less correlated to public market movements, providing greater control and the potential for higher returns. In today’s volatile environment, alternatives enable more resilient portfolios by offering uncorrelated returns, diversification, and access to sectors crucial for societal progress, such as clean energy, infrastructure, and affordable housing.
Opportunity and impact: a hands-on approach
When comparing private equity to traditional public market equity, both involve investing in a company, but the level of active involvement differs significantly. While public equity returns are often influenced by external factors such as market movements, sentiment, and consumer trends, private equity allows for direct, hands-on involvement in shaping a company's future. Asset managers – and investors – can influence strategy, board decisions, management, and target audiences to create value. This active approach means returns are driven not just by market forces but by the manager's own actions.
This active role in value creation is why alternatives, like private equity, are essential to a well-diversified portfolio. Unlike traditional asset classes, which are tied to general market movements, alternatives offer distinct risk factors and the potential for higher returns through more strategic involvement. In unpredictable markets, where traditional investments may not always deliver, alternatives act as a hedge. With the right partner, alternatives can provide returns across a broad range of market environments, adding significant value to a portfolio.
Alternative investments: more than just a subset
While some may see alternatives as a subset of traditional asset classes, at Sanlam Investments Multi-Manager, we view them differently. Each alternative investment has its own distinct characteristics, risk profile, and value proposition. For example, consider property investments: direct property versus listed property. Both fall under the property category but offer vastly different risk and return profiles. Direct property investment involves owning and managing physical assets—finding tenants, handling maintenance, and collecting rents. In contrast, listed property involves owning shares in companies that manage properties, with its own set of risks and rewards. At Sanlam Investments Multi-Manager, we treat these investments separately to ensure appropriate allocation based on client needs and risk-adjusted returns.
Risk mitigation through strategic allocation
Alternatives play a crucial role in risk mitigation. Within our team, our solutions-oriented approach to portfolio management begins by understanding the client's needs and objectives and then working backward to design a portfolio that fits those needs. Alternatives are integral to this process by providing uncorrelated returns that can smooth an investment portfolio’s path, especially in volatile markets.
For instance, in living annuities, where sequence risk—the risk of negative returns at the start of retirement—can have a significant impact, we use up to 20% allocation to private markets. This ensures a smoother, more stable return trajectory, reducing the risks associated with market fluctuations. The inclusion of private credit is especially valuable here, offering liquidity and steady cash flow while maintaining low volatility. This makes private credit ideal for retirees who need a reliable income.
In contrast, portfolios focused on growth often allocate between 1% and 3% to alternatives. With recent changes to Regulation 28, allowing higher allocations to private markets, we are seeing increased interest and willingness to embrace alternatives. These regulatory changes make it easier for institutional investors to incorporate alternatives into their strategies and fully realise their potential.
Currently, our direct investments in private markets and alternatives total R2.5 billion. However, the broader multi-manager portfolios under our management exceed R300 billion, with alternatives playing a vital role across various strategies. This widespread allocation to private markets reflects our firm belief in the value these asset classes bring—not only in terms of return potential but also in terms of the robustness they offer during periods of market uncertainty.
A growing focus on private markets: what’s next?
With the market recognising the value of private markets, we anticipate continued growth in allocations to these sectors. Regulation 28 has already paved the way for greater exposure, and as demand for risk-adjusted returns from alternatives grows, this trend will likely accelerate. Private markets—particularly private equity, private credit, and real estate—offer investors control over their investments, more predictable cash flows, and better risk diversification.
This growing interest in private markets presents an exciting opportunity to build more resilient portfolios that deliver on both financial and social goals. Currently, we are focused on expanding our alternative allocations to ensure clients benefit from the diverse opportunities available in private equity, infrastructure, and other alternatives.
The strategic case for alternative investments
Investing in alternatives goes beyond diversification—it’s about creating value through active involvement, mitigating risks, and accessing opportunities that contribute to both financial growth and societal impact. We view alternatives as integral components of a holistic, solutions-oriented investment strategy designed to meet our clients' unique needs.
As the market evolves, we believe the role of alternatives in a balanced portfolio will continue to grow. By embracing alternatives, we can help clients unlock new sources of return, build resilient portfolios, and make a meaningful impact on the world around us.
* Pillay is a portfolio manager at Sanlam Investments Multi-Manager.
PERSONAL FINANCE