First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 12 - Rob Biddinger - How are Alternatives Expanding the Traditional Toolbox of Investment Professionals? - ROI Podcast
In this episode, Ryan talks to Rob Biddinger, managing director at First Trust Capital Solutions, about the growing popularity of alternative investments, how institutional investors have historically utilized these strategies, and why the democratization of alternatives is under way.
📚 Rob's Book Recommendations:
How I Built This by Guy Raz
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00:00:00:00 - 00:00:46:07
Ryan
Hi, I'm Ryan Isakson, an ETF strategist at First Trust. On this episode of the First Trust ROI podcast, I'm joined by Rob BIDDINGER, managing director of the First Trust Capital Solutions Group. If you've ever wondered about alternative investments, that's what Rob and I are going to talk about on today's episode. We're going to discuss what makes an alternative alternative why more and more investors are considering adding them to a diversified portfolio of stocks and bonds, and why many institutions and high net worth investors have already for decades incorporated some of these assets into their portfolios.
00:00:46:13 - 00:00:55:23
Ryan
Thanks for joining us on this episode of The First Trust Our Way podcast. Rob BIDDINGER, thank you for joining us. Great to have you on the podcast.
00:00:56:00 - 00:00:56:07
Rob
Thanks for.
00:00:56:07 - 00:00:59:14
Ryan
Having me. So I'm curious, have you ever done a podcast like this before?
00:00:59:15 - 00:01:00:18
Rob
This is my first.
00:01:00:20 - 00:01:22:02
Ryan
Okay, so this is your first podcast, but we were talking before and you do have some experience in the on camera, in the media. So I don't want to put you on the spot here, but but tell tell the viewers of the First Trust, our podcast about that. What was your your foray into being on camera?
00:01:22:03 - 00:01:25:02
Rob
Yeah, that's funny. My 15 minutes of.
00:01:25:02 - 00:01:26:13
Ryan
Your 15 minutes of fame, what.
00:01:26:13 - 00:02:07:21
Rob
Was the back story? I have. I've been on selling LA, which was a real estate reality TV show and based in L.A. and real estate. Funny story. There is my neighbor at the time was a producer on the show, so he kind of came to me last minute. They were in need of a buyer or someone to play a buyer, and I had just moved down from San Francisco, and in this case, they were showing sort of a a flat in Venice that they thought would be very appropriate for me playing the role of I'm moving from San Francisco, I'm looking for this this bachelor pad of sorts.
00:02:07:21 - 00:02:14:24
Rob
And so I got to see sort of how the sausage is made. Reality TV So I've still never watched the episode. Kind of a.
00:02:15:08 - 00:02:15:14
Ryan
come.
00:02:15:14 - 00:02:17:04
Rob
On thing. Yeah, yeah.
00:02:17:04 - 00:02:34:01
Ryan
But I am definitely going to search for it after we're done recording this podcast. So I'm hearing you say, and I mean, you have to kind of suspend disbelief when you're watching these reality shows, like it's not exactly as a as it seems. Is that what I'm hearing?
00:02:34:06 - 00:02:52:16
Rob
There were there were quite a few takes some guidance. And, you know, at least my role at the time was was not accurate because I was not looking to to buy a home. And but it was it was a fun experience. It was a real real estate agent. It was a real house that was on the market. But I was not the real buyer.
00:02:52:18 - 00:02:57:13
Ryan
So that is not the career path that you've chosen.
00:02:57:13 - 00:02:58:12
Rob
One and done.
00:02:58:14 - 00:03:04:09
Ryan
One and done. It wasn't your big, you know, discovery breakthrough moment in in California.
00:03:04:09 - 00:03:06:24
Rob
I moved to L.A. for it just didn't pan out, I guess.
00:03:07:03 - 00:03:21:24
Ryan
Okay. So instead, you were working at first trust for the first trust Capital Solutions Group. You're a managing director. And for those that aren't familiar with what the first Trust Capital Solutions Group does. Can you tell me a bit about, you know, what your group does?
00:03:22:00 - 00:03:47:16
Rob
Yeah. Yeah. So we are a group that's dedicated to providing alternative investment solutions for the financial advisors we work with. At First Trust and their clients. As you know, at first trust, historically our business has been built around the financial advisor and you've seen, you know, products and, and resources evolve as the demand has for, for the advisors standpoint.
00:03:47:18 - 00:04:05:20
Rob
And so a few years back we were getting a lot of demand around alternative investments. And so Jim Bowen had asked us to go out and kind of figure out a way to build a first class business in this world. So the business was launched in 2021 and it's been going quite well.
00:04:05:22 - 00:04:20:10
Ryan
To set a baseline. You know, there are some that you know here alternatives and they know exactly what you mean. There are others that hear the word alternatives and they wonder, well, alternative to what? What exactly? When you say alternatives, what should people be hearing? What do they understand when they say.
00:04:20:12 - 00:04:46:02
Rob
I think, simply put, is anything that falls outside of the traditional asset classes, Right. Stocks and bonds. And so even when you get in that space, it's going to be pretty broad. So in some cases there there are illiquid asset classes, things like private equity, private credit, real estate, hedge funds. But it even, you know, can be an alternative in the in the in the public markets as well as things like commodities.
00:04:46:04 - 00:05:02:03
Rob
Cryptocurrencies will be considered alternatives if you get really, really broad things like art and those types of things. Really the way that we view it is anything that has a low correlation to the risk return profile of the traditional asset classes.
00:05:02:05 - 00:05:23:02
Ryan
And and because of that low correlation, is that the main thing that we're looking for? As two questions. First off, what drives that low correlation? And secondly, why is it beneficial for people to think about incorporating some of those? First off, what what drives a little correlation between some of those other assets and what people normally buy, which is maybe stocks and bonds?
00:05:23:02 - 00:05:52:14
Rob
Yeah, Yeah. And in some cases it's the illiquidity of the asset class, right? So if you're if you're talking about private equity, these are these are these are private companies that are growing with the hopes of going public. And so because they're not traded on a day to day basis and you can get a different return profile than you would see in kind of the public markets in some cases, you know, the benefit really is around kind of the way that it impacts a portfolio.
00:05:52:16 - 00:06:14:23
Rob
And so the there are asset classes in the alternative space that are more driven towards driving alpha or hit or excess returns. There are some that are really driven towards risk mitigation, are smoothing out the ride for advisors. I think that's or advisors and their clients. I think that's a lot of what the misperception, where the misperception lies with alternatives is.
00:06:15:00 - 00:06:20:06
Rob
It's built to really smooth out the ride for for advisors and their clients.
00:06:20:11 - 00:06:37:12
Ryan
Okay, So most people, when they think of alternatives, it's usually been focused on some institutions, maybe ultra high net individuals or families. And so is that what your group is focused on? Is that really the target market? And and if so, why is that.
00:06:37:15 - 00:07:00:20
Rob
Historically, that has been where most of the investments in alternatives has gone into that high net worth. And the the institutions, what you've seen there is really it's tied to kind of two main things. It's access and that's everything from manager availability. That's for high minimums, high fees, a lot of those types of things as well as complexity.
00:07:00:22 - 00:07:31:04
Rob
Right. So could the individual investor, do they want to deal with all the pain points that go along with onboarding into these strategies where it's a lot of paperwork, the tax reporting locations and those types of things? And so really our business is built around simplifying the entire experience for what I would call the mass affluent. There's there's a term that's been thrown around quite a bit, which is the democratization of alternatives, where essentially you have these types of investments that are moving downstream.
00:07:31:06 - 00:07:37:06
Rob
And we're really focused on on on helping that with with helping drive that for our advisors.
00:07:37:11 - 00:07:45:05
Ryan
Why are we seeing renewed interest in alternatives, especially over the last few years? Yeah, Yeah. Well, it seems like I'm hearing about alternatives a lot more lately.
00:07:45:05 - 00:08:07:19
Rob
Yeah. And again, I think it what it really starts with with access, right. And so there's been some changes, technology being one of them that have simplified some of those pain points that I mentioned before. The other is you've seen some, some, some structures, some investment structures, what we would call the registered alternative or the semi liquid alternative space, things like general funds.
00:08:07:21 - 00:08:25:09
Rob
These structures have been around for quite some time, but they've really been adopted at a much faster rates. And so it allows an investor to access those managers that are across the landscape of the private markets. But really you're seeing a lot of these types of managers and these types of strategies sort of moving downstream.
00:08:25:11 - 00:08:46:13
Ryan
You've talked you mentioned a couple of times the different liquidity profile. So, you know, I'm an ETF strategist. I think of the ETFs you can sell throughout the trading day. Yeah, that's not the case with most alternatives. So how does that usually work with you? And I know it's different from one strategy to another, but what are some of the ways that liquidity is offered for those sorts of strategies?
00:08:46:13 - 00:08:47:02
Ryan
Yeah.
00:08:47:04 - 00:08:53:06
Rob
Again, the big benefit to investing in this, this world is that illiquidity premium.
00:08:53:08 - 00:08:56:14
Ryan
So you actually can earn a better return because of that.
00:08:56:16 - 00:09:16:11
Rob
That's correct. But we know that that advisors and their clients, they may need their capital sooner than that. Right. And so can you have these types of strategies where you're still getting access to those types of managers and those types of asset classes, but in a more liquid fashion? So the fund is a structure that's, that's really taking off.
00:09:16:13 - 00:09:25:19
Rob
There's currently 82 interval funds, but there's a number more that have been filed. So you'll see a lot more of these coming in the in the coming years. You can exit those.
00:09:25:21 - 00:09:49:18
Ryan
So as you've been, you know, spending more time in this world, what's been maybe the most popular asset class or structure. And, you know, as I ask the question, I'm thinking like, are there certain assets that fit better in a different sort of structure, whether it's an interval fund or some sort of closed end structure. So what's been the most popular set of assets?
00:09:49:20 - 00:09:58:08
Ryan
And along with that, you know, is there a different profile for a certain type of asset in a certain type of alternative fund?
00:09:58:08 - 00:10:19:11
Rob
Yeah, I think the most popular are probably the the ones that you would be familiar with private equity, private credit, those those real estate, those three really, really stand out. And what you would see is the way that we think about building products in this ecosystem. We think about it through three different buckets. You have liquid alternatives, right?
00:10:19:11 - 00:10:45:21
Rob
Those are daily liquid wrappers, things in the ETFs and mutual funds, not every asset class fits well in the daily wrapper. Things like merger arbitrage, things like structured credit work well in that wrapper, long short equity can can can work well in that wrapper as you kind of move out to the semi liquid space or the registered alternative space, you can get a variety of the different asset classes between real estate credit.
00:10:45:21 - 00:11:04:00
Rob
Credit continues to probably be the most popular, but for private equity, for example, those it doesn't tend to fit well in a in a liquid or even a semi liquid wrapper. You really have to have kind of a true lock up, let's call it three years, five or seven years in some cases for private equity.
00:11:04:02 - 00:11:30:20
Ryan
So there's a lot of different managers in each of these asset classes or some asset classes, I guess, and alternatives, when I think of index funds, you know, there's pretty tight range of returns of whether you're buying one version of the S&P 500 or another or even in large cap equities. Is that a similar do we see a similar phenomenon when it comes to some of these alternative asset classes?
00:11:30:22 - 00:11:34:03
Ryan
Is it a fairly tight range of returns or is it broader?
00:11:34:03 - 00:12:06:20
Rob
Yeah, yeah, it's a great question. It's it's much broader in the private markets ecosystem. The manager selection is critical. Who you choose to partner with, who you choose to invest alongside makes all the difference from from a client outcome standpoint. So to put that into context, if you look at the historical range or the spread in the public markets between the best performing managers and the worst performing managers in equities, public equities over time, it's been about 300 basis points, 3% per year.
00:12:06:22 - 00:12:25:06
Rob
If you look at fixed income, it's what's called 1 to 1 and a half percent per year. If you move into the private markets, private equity, for example, the best the the spread between the best performing and the worst performing managers can be in the in the range of 15% per year. To private credit, in close to 8 to 10%.
00:12:25:06 - 00:12:32:23
Rob
Real estate's in that 15% range. So again, who you choose to invest alongside really makes the difference in this world.
00:12:33:00 - 00:12:42:00
Ryan
What are some of the reasons why there's such a wide spread between those two managers that are investing in real estate? Why is there such a wide spread in their returns?
00:12:42:00 - 00:13:09:07
Rob
They're tends to be a spread, right? The difference the reason for that is there's there's there's a lot of inefficiencies in that in that market. Right. There's there's less barriers to entry in some cases. And so what we are finding is, is research is imperative, right? Doing your due diligence, not only understanding the process of the manager, you know, the historical risk and return of that, but also operationally, how do they function.
00:13:09:07 - 00:13:22:02
Rob
And so I think that's one of the the things that you'll see when when when looking at the best performing managers versus the worst is is those inefficiencies and taking advantage of some of those inefficiencies.
00:13:22:04 - 00:13:43:10
Ryan
What are some of the major challenges as investment professionals are thinking about, you know, who some alternatives are appropriate for, you know, how to find different, different alternative managers? What are the major objections that they're coming in that you're getting based on some of the financial professionals you deal with?
00:13:43:10 - 00:14:04:05
Rob
Yeah. One thing I'll say there is we are still in to use the baseball analogy, we're still in the early innings of this democratization of alternatives. So we're finding at first trust that the need for education at the advisor level as well as the end client level is is really important. And that's why it's one of the major focuses that we have, because sometimes it's it's a lack of understanding.
00:14:04:05 - 00:14:30:18
Rob
So maybe the perception is it's these these asset classes or these investments are more complex and so they stay away from them. Maybe historically they've had a bad experience, you know, in the real estate space, for example, the private rights that were built years ago are very different than the private reach structures now. And so, again, a big focus of ours being dedicated to working with financial advisors is educating them on the different asset classes.
00:14:30:22 - 00:14:40:18
Rob
Where do they fit from a portfolio construction standpoint? What are the right structures that you can implement and tailor for your business and for your clients needs?
00:14:40:20 - 00:14:59:23
Ryan
As you kind of have talked with financial professionals and tried to figure out how to best meet their needs, what are some of the ways that first trust is is focused on education? I mean, obviously we're doing a podcast, so maybe this is one way, but but what are some of the ways that your group has focused on educating advisors?
00:14:59:24 - 00:15:23:13
Rob
Yeah, I would say first and foremost at the ground level, right? So we we are a firm that has been built around a financial advisor and meeting with them in person, right on a on a day to day basis. And we're taking the approach within education alternatives. We're taking that same approach, right. So we did last year in 2023, we saw over 2000 advisors.
00:15:23:13 - 00:15:50:15
Rob
We had roadshows, what we were calling alternatives institutes. Again, sitting down with advisors, educating them on the impact of portfolio construction, where they fit all the different types of structures that they may be hearing about. And so that's that's we continue to that plan going into 2024. There's other things like on our website, for example, you can take different tests to get accredited in the interval fund space and learn.
00:15:50:19 - 00:15:53:22
Ryan
Are those prerequisites to be able to sell those.
00:15:54:00 - 00:15:58:08
Rob
In some firms? Yes. And some firms know that's really up to the broker dealer at that point.
00:15:58:08 - 00:16:03:05
Ryan
So but it's never a bad idea to learn more about them if you're planning on utilizing for clients. Yeah.
00:16:03:07 - 00:16:08:12
Rob
Yeah. And I think we'll continue to come with more resources in that space as well moving forward.
00:16:08:13 - 00:16:14:10
Ryan
Okay. So you're putting on a lot of frequent flier miles. Yeah. Is that is that a fair statement?
00:16:14:10 - 00:16:21:04
Rob
My my partners and I are hitting the ground and we again, we will be doing so next year as well.
00:16:21:06 - 00:16:29:24
Ryan
You were telling me again earlier, before we were on camera about you visited all the baseball stadiums across the country. Is that.
00:16:29:24 - 00:16:31:22
Rob
True? That's true. That's true.
00:16:31:24 - 00:16:37:00
Ryan
So you're used to kind of zipping all over the place. But they're definitely not that I graduated.
00:16:37:02 - 00:16:46:23
Rob
I graduated college in 2000. Yeah, that's over 20 years, 20 years ago now. And two friends of mine did 60 days in a geo prism. I don't think we could do that.
00:16:46:24 - 00:16:52:18
Ryan
Geo PRISM. PRISM was for people that aren't familiar. That's like a shoe box on wheels.
00:16:52:20 - 00:17:06:02
Rob
60 days across the United States. And you know, at the time, I mean, there have been a lot of new baseball parks that have been built since then. But at the time we saw about 90% of them. So probably at this point I've been to, let's call it 80% of the.
00:17:06:03 - 00:17:10:18
Ryan
Are there any any notable ones that are sort of on the Rob Binger bucket list that.
00:17:10:20 - 00:17:22:13
Rob
Yeah, I think it's the standard ones, right. It's pretty hard to beat Wrigley. It's pretty hard to beat Fenway. Yeah, I'm a San Francisco Giants fan. So it's it's it's pretty hard to beat. I don't know what they call it now at PAC Bell. It used to be PAC.
00:17:22:13 - 00:17:27:16
Ryan
Bell stuff when they changed the name of parks. Like, I still think of the White Sox as playing at Comiskey Park.
00:17:27:18 - 00:17:28:08
Rob
Yeah.
00:17:28:10 - 00:17:37:23
Ryan
I forgive me for those who are watching the podcast that are yelling, you know, it's such and such. I have no idea what exactly it's to me quickly, just like it's the Sears Tower to me.
00:17:37:23 - 00:17:42:12
Rob
Yeah, well, and we saw the old Yankee Stadium, so I haven't been to the new Yankee Stadium. Certainly iconic.
00:17:42:16 - 00:18:05:07
Ryan
That's excellent. I'm sorry for that digression there. Okay. So another question that I like to ask guests of the first Trust, our podcast is as you're kind of you know, spending time on planes, what are you reading? What what any any good book recommendations in this can be, you know, a business book. It can be a novel. What are you reading these days?
00:18:05:10 - 00:18:30:14
Rob
A book that comes to mind? And this was actually really impactful as we were building out this business, you know, with it was how I built this, which is by a gentleman named Guy RAZ. He actually has a podcast that he does as well, where he interviews founders of companies. And we're talking everything from Netflix to Airbnb to Clif Bar.
00:18:30:18 - 00:18:53:18
Rob
And so a variety of of different businesses. But really going through, you know, how they the the ups and downs of building a business from the idea getting it off the ground to you know where it is at that point and I learned so much I said to my business partners we all learned so much from that. A lot of it is just iteration, iterate, iterate, iterate.
00:18:53:18 - 00:19:00:09
Rob
That's one of the big takeaways. So anybody that's looking to to build a business or grow something, I would, I would highly recommend that book.
00:19:00:12 - 00:19:06:17
Ryan
So it seems to me like you've got a you're well-situated being where you live. You live in the San Francisco area, right?
00:19:06:18 - 00:19:09:03
Rob
Los Angeles. I'm from San Francisco. I live in L.A. now.
00:19:09:03 - 00:19:33:17
Ryan
You're still well-situated. You see private equity and you're dealing with private equity. I'm curious, like there's been a big slowdown in companies that are private companies going public. Do you have any opinions on whether or not that's, you know, are we going to see an acceleration in that at some point in the next year or so, 2024? I mean, we're recording this in 2023, but it's going to air in 2024.
00:19:33:19 - 00:19:35:20
Ryan
What do you do? You have a perspective on that?
00:19:35:20 - 00:19:54:10
Rob
Yeah, I think we would anticipate it that anticipate that it does pick up. However, I mean, it was things were pretty good and pretty frothy for for private companies, you know, for a variety of reasons. Some of them were interest rates were right. That environment has changed quite a bit. That will has had and will continue to have an impact on those types of companies.
00:19:54:12 - 00:20:14:07
Rob
You've seen IPO, we've seen the number of companies IPO or that activity pick up recently, but those IPOs haven't performed as well. Yeah, public markets grew. But what we're seeing, you know, because we deal in that in that private equity or that growth equity space quite a bit, We're seeing kind of a pickup in plans to to IPO.
00:20:14:07 - 00:20:21:24
Rob
So I think it's you know, we had to have this decompression in that market moving forward. We're in a much healthier space, though.
00:20:22:01 - 00:20:46:01
Ryan
What do you think about real estate? I mean, again, I'm thinking of California, where especially in some of the bigger cities, there seems to be a lot of occupancy or lack of occupancy. A lot of a lot of people haven't necessarily returned back to the office. Is that something that, you know, as you're talking to some of the real estate investors, that that we'll see a recovery in?
00:20:46:01 - 00:20:47:04
Ryan
What do you have an outlook there?
00:20:47:04 - 00:21:10:23
Rob
Yeah, well, I think that goes back to sort of the inefficiencies. Right. Every market has different dynamics that come along with it. Even the the sub asset classes within real estate have different dynamics. Right. Whether you're a retail, whether you're commercial, those types of things. So if you're you know, if you're own a lot of commercial property in San Francisco.
00:21:10:23 - 00:21:41:22
Rob
Yeah. You know we're in the early innings of a change there that's probably going to last for for many, many years. And you're seeing some of this this repricing and recapitalization and some of these these properties that is dramatically lower than probably what people purchase them. So you'll see some of that play out over time. Yeah. But as we talk to our real estate operators, there's in some asset classes, there's great opportunities right now if you've got the the capital to put to work, we think that there's going to be some great opportunities for those opportunistic managers.
00:21:42:00 - 00:22:09:17
Ryan
It seems to me that, you know, you think of lacking liquidity sometimes that's viewed as a negative. Obviously, if you want to be able to like get your money back, that's that's a negative. But if you're going to invest in real estate, especially if it's something like distressed real estate, like you'd see in some of those commercial buildings, having that longer time horizon is really when you can make outsized returns because of, you know, not necessarily I think it can help behaviorally.
00:22:09:17 - 00:22:15:22
Ryan
Maybe people stay put because they recognize, you know, they don't even have the liquidity. They can't just they can't head for the hills. Yeah.
00:22:15:22 - 00:22:37:11
Rob
And that's where that illiquidity premium that we discussed, that's where that's where that comes from. Yeah. As again, as we're educating advisors around where these different types of asset classes fit, typically it is hey, this is the, the least liquid part of the portfolio right. If you if you have clients that that need to sell this in the next year or two years, three years, this is probably not the best place for them.
00:22:37:13 - 00:22:56:04
Ryan
When you talk to investment professionals that are using alternatives, they're building it into asset allocation for clients. What does it tend to displace? Is it more a part of what was previously their equity portfolio or equity allocation is a part of their fixed income allocation blend? What are you seeing most often? Yeah, I.
00:22:56:04 - 00:23:13:03
Rob
Think it really depends on on the client, right in their and their need, their risk profile, their need for income. A lot of those types of things, typically it's probably a blend. You know, if we're recommending it's really hard for the advisor to just pick one of the asset classes just picking private credit or just picking real estate.
00:23:13:03 - 00:23:32:05
Rob
And we've seen, you know, especially this year where there was people that were overweight towards real estate and you seen drawdowns in those types of portfolio. So we're really recommending as a core to say, hey, you want to own all these different asset classes, let us be your partner, we can help you structure it so it's efficient for for your clients and in the way that portfolios are built.
00:23:32:07 - 00:23:51:22
Rob
And then take that from a mix of both the equity side and the fixed income side. And what you've seen historically from from a risk return profile is you even even hands out returns in these types of strategies, but more importantly, you've reduced risk. For example, this is this is something that we show our advisors quite a bit.
00:23:51:24 - 00:24:27:10
Rob
If you look at the last 15 years and everyone is in the kind of a traditional 6040 portfolio, there's been there's been a lot of talk about the the 6040 model is dead and all those types of things. But if you took kind of your traditional asset class stocks and bonds and blended them together over the course of the last 15 years, if you if you took 25% a mixture from the equity side and the fixed income side, if you put that diversified that across all the different asset classes of alternatives, you actually you slightly increase the return of that portfolio, but you actually reduce the risk by 30%.
00:24:27:10 - 00:24:33:09
Rob
And these are just looking at basic index returns. So that's something I don't think that everybody knows when it comes to.
00:24:33:09 - 00:24:46:11
Ryan
And that was a 25% leave to alternative to alternatives. Yeah, Yeah. It seems like one of the risks that that you could run if you're someone new to alternatives is you know obviously you need a balance of too much and too little.
00:24:46:11 - 00:24:46:24
Rob
Correct.
00:24:47:01 - 00:25:03:12
Ryan
And what I've seen as I've talked to people is sometimes when they dip the toe in, they don't actually move the needle. Yeah, they don't they don't put a you know, you put a 2% allocation or 3% allocation, you know, maybe that's okay to get, you know, get used to it, get a feel for a certain type of investment.
00:25:03:12 - 00:25:08:04
Ryan
But from a risk return standpoint, I'm not sure that is going to move the needle. Am I right on that?
00:25:08:04 - 00:25:31:05
Rob
Yeah. Yeah. And we would agree. I mean, we're typically advising the people that we work with the kind of start at 10%, 25 might be pushing it again. It depends on what their client profile course like. Yeah but when we talk about that democratization of alternatives that I brought up earlier, one of the reasons why you're seeing such demand at this point is when you look at it, the reality is advisors investing in these types of strategies with their clients.
00:25:31:05 - 00:25:38:13
Rob
They're far behind, right, far behind when you compare it to institutions. So endowments now they have a very different time profile.
00:25:38:13 - 00:25:39:09
Ryan
They've got a really long.
00:25:39:09 - 00:26:03:14
Rob
Ride, but endowments typically will have anywhere between 50 and 60% of portfolios invested in the private markets. Right? So you look at other other institutional investors, pensions, sovereign wealth funds, etc., they tend to be in that kind of 25, 30, 40% range. We probably think that's too much for the private client. Sure. But again, to your point, if you're in the two, three, 4% range, it's probably not making the impact that that could or should.
00:26:03:14 - 00:26:25:04
Ryan
Yeah, obviously it's you have to figure out what the, you know, the needs of the investor are, the risk that they're able to bear and make an appropriate decision yet. Yeah that makes it makes it's interesting when did when did the endowments really start to embrace alternatives because it seems like for for many years that was really where you heard mostly about alternatives.
00:26:25:05 - 00:26:30:02
Ryan
Yeah some of some of those endowments and the idea when they really started to turn that.
00:26:30:06 - 00:27:05:13
Rob
It definitely goes back a number of years. We actually did a study where we looked at two of the largest, most well known endowments, Yale and Harvard, and we compared them their returns to the traditional 6040 portfolio, 60% in the S&P, 40% in the AG. If you going back and we did a starting going back to 2001 so we could get all the the Harvard and Yale data going back to, you know, 22 years, I guess it is the endowment model of those 22 years, 16 of the 22 that it outperformed the S&P.
00:27:05:13 - 00:27:22:18
Rob
So what, 73% of the time, Yale was the best performer of those three Yale, Harvard, the 60, 40, 10.7% annualized since 2001. The 6040 was just under 6%, 5.94%, I believe.
00:27:22:21 - 00:27:23:14
Ryan
Yeah, that's a.
00:27:23:16 - 00:27:36:21
Rob
Pretty big when you start to look at the dollar growth. If you would invest in a dollar alongside Yale versus a dollar alongside or in the 6040. Yeah, it's a pretty dramatic difference over a 21 year period fall.
00:27:37:02 - 00:27:55:02
Ryan
Okay. So we're coming up to the half hour mark. Time flies. Great, great conversation. The question that I'd like to end on, though, is as you think about 2024 or again, we're hearing this beginning of 2024, what are you optimist stick about?
00:27:55:07 - 00:28:16:08
Rob
I would say as it relates to our business, I'm very optimistic in that kind of continued path and mission, if you will, to educate the advisor. Like I said, we're in the early innings. And so our plan to get out there help advisors and their clients implement these types of strategies. So our plan there is probably what I'm most, most optimistic about next year.
00:28:16:09 - 00:28:23:22
Ryan
Rob BIDDINGER, thank you for spending some time with us on the First Trust, our podcast. Maybe we can do it again sometime in the future. I enjoyed.
00:28:23:22 - 00:28:24:06
Rob
It. Thanks for.
00:28:24:06 - 00:28:40:24
Ryan
Having me. All right. Thank you. And thanks to all of you for joining us on the Hour podcast.
