Top questions from models clients: alternatives, AI, and uncertainty

Key takeaways

• Alternative assets (alts) can be complementary to traditional stocks and bonds, but selection should carefully consider the portfolio’s objective
• Artificial intelligence (AI) has become a structural force with benefits spreading beyond early winners
• Heightened uncertainty may raise flags but doesn’t always call for outright de-risking

We recently surveyed our top clients to hear what’s on their minds, in preparation for our annual Asset Allocation Forum. There were concerns about whipsawing oil prices, inquiries about where AI goes from here, and questions about what the growing menu of alternatives can offer portfolios. Our team hosted three days of programming at the forum and met with over 100 custom model portfolio clients from around the country to discuss these questions and more. Here are themes that advisors asked about the most…

Theme 1: How should advisors consider fitting alternatives into wealth portfolios?

By now it may be old news that the traditional stock/bond portfolio has company: the rise of accessible alternative assets. About 20% of the 113 advisors surveyed asked to hear more about the asset class. A shifting rate environment and series of various inflation surprises introduced new needs for diversified return streams and distinct sources of risk. Advisors have been working on the problems of capital preservation, growth, and income for decades, but alts come with a new suite of considerations.

Many wealth practices are still in early stages of ramping up their alts offerings (whether private or liquid). Our model portfolios with alts attempt to bridge that gap of awareness and implementation. Several clients also flagged that a growing field of offerings can be difficult to navigate. My team looks at alts as serving one of two functions: your potential return amplifiers that may come with higher risk, and portfolio diversifiers that may offer differentiated sources of return. We believe understanding the desired outcome is critical to picking the right alternatives solution.

Theme 2: How is AI affecting markets, and should advisors care?

AI is perhaps the defining feature of the current regime. It has shifted from the role of a minor theme to a major force in markets. Advisors asked us about how AI will impact markets in the upcoming years, how to think of it within portfolios, and whether or not we’re waiting for the shoe to drop. We think that AI is a tailwind for stocks and the economy, but the role that it plays is evolving.

My colleagues Lisa O’Connor, Oscar Pulido, and Ibrahim Kanan hosted a session at the forum about investing during the AI revolution. Early stages of the “AI trade” focused on semiconductors and megacap stocks. The panel discussed how the trade could be broadening into the stocks of effective AI implementers. A focus of the Fundamental Equities team at BlackRock has been to identify firms that have translated AI adoption into real earnings. We don’t expect the benefits of AI to be evenly distributed, and strategies taking this kind of approach could help us capture that broadening in portfolios.

Theme 3: How can portfolios navigate geopolitical uncertainty and oil shocks?

Both before and after the oil disruption this spring, our team heard a lot of concerns from advisors about geopolitics and uncertainty. During the time of our March trade, we reaffirmed our general risk-on stance. A strong economic backdrop at the start of the year laid a constructive foundation for risk assets at that time. By producing more oil than any other country in the world¹, the United States is also partially insulated from global shortages. For import-heavy countries, particularly in Europe and East Asia, higher oil could raise other prices and depress margins.

We opted to be more intentional about where we take risk and moved to help solidify the bond sleeve’s defensive characteristics. Markets have whipsawed, in both directions, since the beginning of the shock. We think that volatility could remain somewhat elevated, with oil as a potentially useful barometer of expectations, yet are looking through the noise towards changes in hard data.

Until next time

As always, I had a great time meeting with clients and talking shop at the forum. These questions are the exact considerations that we take on a daily basis when building model portfolios. We carefully construct portfolios to adapt to changing market conditions, seeking new opportunities while mitigating shifting risks. The themes that we continue to hear about from clients highlight the most important things affecting portfolios right now, and as markets evolve this year we’ll keep our eye on how these themes evolve alongside them.