CIO Insights Resilience versus recession 07 Alternatives: if you don't like beta, try alpha Stocks and bonds are essential to a balanced portfolio but, of course, they do not have to be the only components. There are a variety of alternative asset classes available to investors depending on the objectives they wish to attain with their portfolios. Investors seeking a yield in excess of the market return (positive “alpha”) may want to investigate actively managed illiquid investments such as private equity, private debt (non-bank corporate financing), venture capital and infrastructure investments. Investors hope that these will improve the diversification of their portfolios, deliver reliable and high returns and provide a certain degree of protection against inflation. Investors looking to hedge their portfolio against inflation might look to real estate, especially as rents can rise faster than the inflation rate during phases of high inflation. This approach can be successful but also has risks and must be appropriate to the investor. Figure 12: If beta (overall market return) is problematic, add active management Source: Cambridge Associates, Deutsche Bank AG. Data as of September 2022. Average Annual Manager Returns by Asset Class % 25 80 70 20 60 15 50 40 10 30 20 5 10 0 0 Core/ Emerging U.S. Global ex U.S. U.S. U.S. Global Global Global Core Plus Markets Large-Cap U.S. Small-Cap Large-Cap Small-Cap Real Estate Private Venture Bonds Value equitiy Value Growth Growth Equity Capital Median (lhs) top 5th Percentile (rhs) Real estate illustrates the risk and opportunities involved. Rising interest rates in 2022 have challenged the upward movement in prices in the global residential real estate market. In the U.S., for example, mortgage interest rates are at their highest level in more than 20 years and the number of houses sold has fallen by almost 30% since its peak in 2020. However, persistently high demand for housing could increase further in the next few years and vacancy rates in the U.S. are still at a historical low. Financing and construction costs are also likely to hold back supply, meaning that the price of new-build residential property is not likely to fall by any significant amount in the near future. Within the commercial property sector, the logistics segment may offer interesting opportunities. The growth of online retail and rising demand for warehouse capacity to safeguard against supply chain issues are keeping vacancy rates low, making rent increases feasible. The vacancy rates for retail and office properties, on the other hand, are significantly higher. Overall, real estate markets may be going through a rather fragile transition period that will potentially last one to two years. However, our sentiment towards this asset class remains generally positive, especially as rents will likely increase further in the long term. In times of high inflation rental properties can offer resilient earnings and inflation supports the argument that property should remain a key component of diversified portfolios. In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Performance refers to a nominal value based on price gains/losses and does not take into account inflation. Inflation will have a negative impact on the purchasing power of this nominal monetary value. Depending on the current level of inflation, this may lead to a real loss in value, even if the nominal performance of the investment is positive. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. This document was produced in December 2022. 19