New KKR Report Explains Why Investors Need to Look Beyond Traditional Inflation Hedges to Protect Returns and Enhance Portfolio Diversification
KKR, a leading global investment firm, today announced the release of Regime Change: The Role of Real Assets in the ‘Traditional’ Portfolio by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA) and Racim Allouani, Head of Portfolio Construction, Investment Risk Management and Quantitative Analysis at KKR. This latest Insights piece is the fourth installment in a series dedicated primarily to portfolio construction. While the prior portfolio construction pieces delved more into the roles of Private Credit and Private Equity in a diversified portfolio, this note focuses more heavily on Private Real Assets exposure.
McVey and Allouani explain that, despite record monetary tightening around the globe, persistent inflationary trends across many developed markets, including sticky wage pressures, heightened geopolitics, and repositioning of global supply chains, have strengthened their conviction in their original thesis for investors to consider diversifying beyond the traditional stock and bond 60/40 portfolio. A major underpinning of their view is that stocks and bonds are becoming increasingly more correlated, an important structural change for asset allocation. Against this backdrop, McVey and Allouani assert that Private Real Assets can offer diversification benefits that can help many investors better protect their returns in this new investing regime. Moreover, in this cycle, many Private Real Assets have outperformed traditional inflation hedges, including Inflation-Protected Notes (TIPS) as well as Public REITs.
This conviction is reflected in investment allocations on KKR’s balance sheet, where Private Real Assets have increased from 18% in 2018 to nearly 25% by the second quarter of 2023.
“Real Assets have delivered both strong upfront yield as well as a compelling total return during one of the fastest increases in both interest rates and inflation that we have seen in 50 years. Importantly, though, we still see more opportunities ahead for this asset class, given today’s complex macroeconomic environment. As such, for investors who have the liquidity budget to spend on potentially enhancing returns, we think that there is an opportunity to benefit from allocations to Asset-Based Finance (ABF), Real Estate Credit, and Infrastructure,” said McVey and Allouani.
Links to access this report in full as well as an archive of Henry McVey's previous publications follow:
- To read the latest Insights, click here.
- To read prior installments in our portfolio construction series, click here, here and here.
- For an archive of previous publications, click here.
About Henry McVey
Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Global Operating Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.
About Racim Allouani
Racim Allouani joined KKR in 2015 and oversees Portfolio Construction, Investment Risk Management and Quantitative Analysis across KKR Private and Public Markets. Prior to joining KKR, he spent five years at the hedge fund of Lombard Odier as a senior quantitative portfolio analyst and risk manager, covering equity and credit long/short strategies. Prior to that, he was at Arden Asset Management, a fund of hedge funds, in the portfolio optimization group. Mr. Allouani also previously held positions at Deutsche Bank in equity research and Bank West LB in fixed income research. Learn more about Mr. Allouani here.
KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com.
The views expressed in the report and summarized herein are the personal views of Henry McVey and Racim Allouani of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This release is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and KKR, Mr. McVey and Mr. Allouani do not assume any duty to update such statements except as required by law.