Cliff Corso is the president and CIO of Advisors Asset Management (AAM). Prior to joining the firm in 2021, Corso accrued more than 35 years’ worth of experience in asset allocation and investment management roles. In his dual role, he helps supervise the day-to-day management of AAM and the firm’s $41.5 billion in assets.
Russ Alan Prince: You believe there is a generational opportunity in alternatives. What is driving that, and what sectors are you most bullish on?
Cliff Corso: Here at AAM, we're focused on helping financial advisors achieve their investment goals. What we’re hearing from conversations with our client base of financial advisors is that they're facing challenges in creating better investment portfolio outcomes. The traditional 60% stocks and 40% bonds model has seen its own challenges as inflation remains elevated, the Fed has raised rates, and the negative correlation between stock and bond prices has weakened. As the public markets have grown crowded and more correlated, it’s not only become harder to achieve diversity across a portfolio but also to have said diversity reliably produce alpha and steady income over time.
With that in mind, alternatives can play an impactful role in generating better portfolio outcomes. While the institutional market has had access to alternatives for the better part of 25+ years, historically, the retail market has had a harder time accessing alternatives. That's all changing dramatically, as there's been remarkable democratization across the wealth channels in terms of institutional alternatives and asset managers entering the market. This shift can also be seen in the evolution of investment vehicles and means of accessing alternatives created for the wealth channel.
Newer vehicles such as non-traded business development companies, non-traded REITs and interval funds have removed many of the impediments that have traditionally existed for retail investors, including long lockups, uncertain capital draw schedules and complex tax documents.
Comparatively, institutions have roughly 15% to upwards of 30%+ of their portfolios allocated to alternatives. Currently, retail investors have allocated less than 5% to alternatives. However, because of the aforementioned changes in ease of access and strong value proposition, those allocations are set to grow to 15% to 25%, not far off from where institutional allocations presently are. It's a very large market we're talking about, and the money in motion could be in the trillions.
As for the sectors with the most opportunity, AAM is looking at real assets in core sectors of alternatives such as infrastructure and real estate, industrials in particular, as well as private lending and private credit. We like those sectors because they are less correlated to the public markets and tend to generate steady, predictably high levels of income. In addition to steady income, these sectors also come with potential capital appreciation opportunities. Because they tend to be larger sectors in the market, they also provide core alternatives anchors within a portfolio allocation.
Prince: Commercial real estate has been under the microscope this year, but you highlighted industrials. What tailwinds is that sector benefiting from?
Corso: When you talk about commercial real estate, people sometimes tend to treat it as one indistinguishable sector when, in reality, it's a combination of several sectors. While there are a lot of fears, particularly around commercial office space, current trends have industrials well-positioned for a boom over the next few years. If you take a step back, almost everything that you touch on a daily basis, whether it’s the shirt you’re wearing, the packages outside your door, or your phone, was delivered in some way, shape or form through a warehouse. Industrials are a critical backbone of our economic infrastructure, and the demand curve is growing significantly, yet the supply of new, high-quality industrial is still not equal to the expected demand.
An example of this supply-demand imbalance can be seen in the vacancy rate of industrial properties in the U.S., which is somewhere around the order of 3%. That's among the lowest vacancy rates with the longest secular tailwind, and in our minds, represents a considerable opportunity in terms of income and returns.
Another factor invigorating industrials is the growth of e-commerce, which is, of course, facilitated through warehouses and is expected to trounce brick-and-mortar entities in terms of retail sales over the coming years. Given these conditions, we’ve focused on industrials as a core part of portfolio construction as we believe they are a reliable way to earn notably solid returns over time.
Prince: What kind of opportunity is there within private credit, and what investment vehicle is best to access it?
Corso: We think there's an evolving and significant opportunity within private credit. While large businesses form a substantial part of our economy, a large amount of economic activity is driven by small and mid-sized businesses. Typically, they procure capital from banks or private lenders and borrow less in public markets. Earlier this year, there were a handful of bankruptcies among regional banks, and we’re now seeing those same issues crimp lending from small to mid-sized banks. Because the supply of lending from traditional banks is dwindling, private lenders can step into the breach and provide the fuel to help boost the economy through small and mid-sized businesses.
As these banks shrink, private lenders will be able to fill the gap for small to mid-sized businesses and really drive the terms of lending transactions. Likewise, as private small and mid-sized enterprises tend to be less uniform in terms of the segments driving their business models, there are unique prospects to drive alpha in less trafficked spheres.
In terms of making headway, the above-mentioned newer investment vehicles are well-positioned to help investors access private credit. We like vehicles such as non-traded business development companies for private credit, as they’re transparent, have very simplified tax documents, and are configured in a fund format that allows investors to invest when they're ready.
Russ Alan Prince is the executive director of Private Wealth and a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.