This publication recently spoke to Bernstein Private Wealth Management and its chief investment officer about how it approaches asset allocation, risk and liquidity management for clients in what have been volatile times.

When US interest rates were raised after the pandemic to choke off higher inflation, tightening monetary policy after more than a decade of ultra-low rates hit certain sectors with a jolt. 

But, as is usually the way with investing, opportunities opened up as valuations in certain areas, such as US commercial real estate, were affected by the hikes. At Bernstein Private Wealth Management, the change presented a chance to enter the market. 

“US commercial real estate is high on our list. The disruption that has occurred as a direct result of the rate spike, made worse by the short-lived but longer-healing regional bank crisis, has reset values across all property types by 30 per cent to 40 per cent, in our opinion,” Alex Chaloff, chief investment officer of Bernstein Private Wealth Management, told this news service. 

“We think the real estate sector’s fundamental story is finally approaching an inflection point. We are investing in long-dated, private-equity-like structures that are more opportunistic/value-add, strategies that seek to provide current yield by investing in stabilized assets that have been hit by the lack of financing more than any stress and, finally, stepping into the void of that financing by providing real estate operators with debt when there is a lack of such lending,” Chaloff said.

This news service has been talking to wealth and asset managers about their approach to asset allocation and location in light of changing monetary policy and possible moves to tax (see an analysis here). After ending about 12 years’ of quantitative easing and ultra-low rates, central banks raised rates sharply, although they’ve started to cut them in recent weeks. The US Federal Reserve cut rates by 50 basis points last week. 

Bernstein’s Chaloff said that when it comes to thinking about the big picture of asset allocation, the firm tends to be “much more focused on the long term than on the next six to 12 months.”

“For the liquid portion of client portfolios, we’re focused on ensuring our current exposures are at or near long-term strategic allocation targets. For clients who have built up cash in the elevated interest rate environment, high-quality bonds are a good first step off the sidelines,” Chaloff said. “As inflation has fallen closer to target, bonds have started performing their intended role in a portfolio, and enjoy higher yields than we have seen in more than a decade. Though we have already seen some of the benefit from Fed rate cuts, but investors can still participate in the cycle. We expect equities to be supported by earnings' growth in the next year. We also see pockets of attractive valuation left by extreme market concentration in the last year-plus. To be sure, some clients perceive risks to be elevated, and we are responding by adding risk management strategies that can reduce volatility, but also allow for upside participation.”

Risk management
Chaloff said Bernstein has enhanced its risk management capabilities in public markets, because most of its clients have a liquid component on their balance sheet.

“We have launched new ideas in the buffered ETF space to provide our investors with the measure of safety they prefer without cutting them out of potential gains in the equity markets,” he said. “And we have enhanced other risk management strategies to keep up with the changing times and elevated volatility levels. We also emphasize diversification across asset classes, public and private. And just like our investors own public equity and public debt, they also own private equity and private debt. The usage of private alternatives where possible and appropriate, can be additive to return but also lower volatility.”

“There are some who say that the volatility reduction that comes from infrequent valuations in private markets is artificial. Our view is that the delay in pricing, the less frequent valuations, and a lack of ability to take action during inopportune periods all help to make the investment experience smoother and should not be discounted,” Chaloff said. 

Looking for alternatives
When it comes to investing in alternative areas – such as hedge funds – while not jettisoning liquidity, Chaloff said Bernstein favors diversified hedge funds. 

“Hedged equity, for example, has been very strong in 2024 and we have been rewarded by continuing to maintain a healthy exposure. And, with more favorable liquidity, investors can rebalance in consideration of long-only portfolios on a consistent basis,” Chaloff said. 

FWR asked Chaloff how Bernstein approaches diversification and whether the old 60/40 equity/bond allocation split is now dead or is there still traction in it?

“60/40 is relevant as a starting point for asset allocation discussions. But it’s just that – a starting point. When we constructed our alternative asset allocation modeling tool, we used 60/40 to establish the base-case allocations. Today, our client allocations generally contain 10 per cent to 30 per cent alternative investments. 60/40 may represent the liquid portfolio, but it’s a smaller portion of the investible balance sheet,” Chaloff said.

“There is good news in 60/40 land in the current environment. Bonds continue to be a large contributor to cash flow for our investors. We care about whether they can (1) generate attractive levels of income and (2) offset public equity market volatility. With rates now back near multi-decade highs, we’re much more positive on their income offering. And with the inflation genie now appearing to be back in the bottle, we expect they’ll return to being decent diversifiers during growth shocks that hurt stocks. In summary, 60/40 is still important but it’s important for a smaller piece of the pie,” he said. 

The amount of exposure clients have to alternative investments (hedge funds, private equity, etc) varies based on client circumstances, and that is mostly driven by spending (the need for liquidity) and risk tolerance. 

“For clients who have a liquidity buffer and accept a lack of control and a potential deep J-curve, we are active allocators to alternative investments. We constructed a proprietary alternative investment allocation tool that allows us to ensure that the overall size and the mix of our alts makes sense for any given client and compares the trade-offs of, say, liquidity, with that of volatility and total returns,” Chaloff said. (The “J-curve” point refers to how, in the early years of investing – in say, private equity – there is a negative return as money is put to work, before a positive return kicks in later.)