Alternative assets: portfolio diversification with these funds

Once upon a time, no one talked about the timing of the first interest rate cut by the Federal Reserve (Fed) or the European Central Bank (ECB). During that era, expansive monetary policy aimed to assist major developed economies in overcoming the severe crisis that began in 2008, ultimately resulting in the imposition of negative official rates. In essence, credit institutions depositing funds in ECB accounts found themselves obligated to pay for that privilege.

Given the current scenario where interest rates are at their peak in both Europe and the United States, coupled with a global pandemic, that era may seem from the distant past–hence the literary-style opening of this text. But it actually remained relevant from 2014 until 2022. Over this long period, companies like MAPFRE, with conservative balance sheets heavily exposed to top-quality sovereign and corporate debt, faced challenges. Matching high returns with asset and liability duration proved difficult, given the presence of old portfolios with high guaranteed rates. In this context, companies such as MAPFRE pursued higher returns by venturing into alternative assets.

“Alternative investment plays a key role in our long-term diversification strategy,” remarked Eduardo Ripollés, Head of Institutional Business and Sales at MAPFRE AM, in March of last year, during the launch of one of the latest products by the asset manager focusing on these types of assets: MAPFRE Private Debt Fil. This initiative to counter low interest rates has been accompanied, since 2018, by the introduction of new funds in areas such as venture capital, real estate, infrastructure, renewables, and private debt. Since then, the company has been actively increasing its exposure to this area and exploring new investment opportunities. As of last year, commitments to these types of assets had reached 1.35 billion euros.

MAPFRE's alternative assets

Its catalog includes the aforementioned MAPFRE Private Debt Fil, a private debt fund of funds that aggregates all investments from Mapfre’s subsidiaries. Its objective is to achieve exposure to 15 funds managed by major asset managers, focusing mainly on Europe and in euros. However, it is not available to retail investors: as specified in the prospectus, it is only available for investment from the balance sheets of MAPFRE Group companies.

Together with its partners Abante Asesores, the asset manager launched in the Mapfre Private Equity FCR fund in 2020. With a minimum investment of 100,000 euros, it allows for coverage of buyouts and venture capital through primaries, secondaries, and co-investments, and the Mapfre Infraestructuras FCR vehicle. Mapfre Energías Renovables I FCR, after reaching an agreement with Iberdrola, and MAPFRE Energías Renovables II FCR came later.

The infrastructure fund of funds invests in strategies managed by Macquarie Infrastructure and Real Assets (MIRA), the world’s largest infrastructure group. It includes participation from major investors such as Grupo Catalana Occidente or MSV Life, as well as pension funds, family offices, investment fund managers, and other private banking investors. In the case of renewable energy funds, the first, in partnership with Iberdrola, was launched for the development of wind and photovoltaic plants. The second, initiated in 2023, focuses on biomethane investment and aims to raise up to 100 million euros in its initial phase to develop production plants in Spain, targeting an annual return of 12% to 15%.

MAPFRE’s real estate exposure represented approximately 60% of the group’s total investment in alternative assets in 2022. The foray into real estate began in 2018 with GLL, a subsidiary of the Macquarie group, through a joint investment vehicle targeting prime offices in key European markets. In 2019, in collaboration with Swiss Life, it established an investment vehicle focused on prime offices in Paris. In 2021, this partnership transitioned into a joint venture with an initial asset volume of 400 million euros, with plans to invest in Spain and Italy. Finally, another fund with similar characteristics was launched with Munich RE.

Retail investor

Including alternative assets in an investor’s portfolio can offer significant benefits, such as “diversification compared to the rest of the portfolio, low correlation with market movements, thereby reducing volatility, and access to opportunities unavailable in liquid markets,” explained Conchi Bravo, Head of Alternative Investments at MAPFRE AM, in a recent interview.

The fund manager’s commitment in this area exemplifies how large institutional investors are leveraging these assets to enhance their portfolios. For individual investors, it is crucial to consider their risk profile and investment objectives before exploring these opportunities, always evaluating the option of seeking expertise and guidance from a financial expert.

As MAPFRE Gestión Patrimonial (MGP) Investment manager Daniel Sancho cautions, it is essential to recognize that alternative assets are not suitable for all investor profiles: “While they are beneficial for diversifying portfolios, their high entry thresholds and illiquid nature make them less than optimal for inexperienced investors.”

In terms of exposure or weight within the portfolio, there is no one-size-fits-all recommendation. However, general guidelines suggest that a range of 5% to 20% may be appropriate for many investors. The specific allocation within this range will vary based on the investor’s risk tolerance and objectives.

Alternative asset risks

Alternative assets come with their own set of risks, which include:

• Liquidity: many alternative assets, such as real estate and private equity, lack the liquidity of stocks and bonds. This means they can be challenging to sell quickly without significant loss.
• Complexity: some alternative assets can be more difficult to understand and lack the transparency of traditional assets. Understanding their value and risks may be more challenging.
• Risk of Loss: like any investment, there is a risk of losing money. Alternative assets can be volatile and more susceptible to sudden market changes.
• Costs: investing in alternative assets often incurs higher costs compared to traditional assets. This includes initial minimum investment requirements, management fees, and performance-based fees paid to fund managers.