19SEPTEMBER 2022After a long stretch of out performance by growth stocks, value stocks have shown signs of life over the past year and deep value in particular. Despite the recent rally, the value factor has continued to trade at a steep discount to the market, especially outside the US. In addition to attractive relative valuations, higher interest rates and inflation may bode well for a continued rebound in value, which has tended to do well in periods of rising prices.Regardless of the specific timing and duration of a shift to value, we think the takeaway for allocators is that this may be a time to be thoughtful about factor exposures. Are there value-oriented strategies that might enhance an alternatives portfolio? Do certain managers in the portfolio have exposure to regions of the world that may be attractive from a value perspective (perhaps Europe or emerging markets, for example) or even just a value tilt in their philosophy and process that could be advantageous?Finally, we think a number of trends may provide rational for allocators to pull down artificial walls in their portfolios, including within their alternatives allocations.For example, across the global economy we are witnessing what we have described as an innovation super-cycle, which was accelerated by the pandemic.It has affected private companies as much as public companies, as evidenced by the shifting sector composition of the private equity marketWe think this speaks to the need for allocators and managers to look across the entire equity ecosystem to understand sector dynamics and identify potential winners and losers, as public and private companies will increasingly compete with one another.Taking this one step further, hybrid or crossover managers may be well positioned to identify arbitrage opportunities within the equity ecosystem.Another area where allocators might do well to pull down walls is between traditional fixed income assets and diversifying alternative strategies that might help with the objectives typically associated with traditional fixed income. Given fairly muted return expectations for some areas of the fixed income market, for example, asset owners seeking higher returns and willing to take on some additional risk might want to consider potential fixed income strategies such as private credit and absolute return strategies (e.g., relative value). Geopolitics, inflation, and Central Banks monetary policy have agitated financial markets in 2022, leaving returns and diversification in short supplyALTERNATIVE ALLOCATION PERSPECTIVE
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