KKR Releases “Regime Change: Enhancing the ‘Traditional’ Portfolio”

Latest Macro Report Highlights Why Today’s Investment Regime Warrants a New Approach to Portfolio Construction

KKR, a leading global investment firm, today announced the release of Regime Change: Enhancing the ‘Traditional’ Portfolio by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA) and Racim Allouani, who oversees Portfolio Construction, Risk Management and Quantitative Analysis across KKR’s Private and Public Markets Investments. In the latest Insights piece, McVey and Allouani assert that we have entered a new investment regime in which rising interest rates, higher levels of inflation, heightened geopolitical risks and structural forces, including a changing relationship between stocks and bonds, are creating the need for a new approach to portfolio construction.

“In today’s world of heightened macro and geopolitical uncertainty, we suggest that allocators of capital revisit whether the underlying characteristics of their existing portfolios may be changing. We firmly believe that what has worked in the past, particularly in the last decade of returns being enhanced by the negative correlation of stocks and bonds, will not be as effective in the new macroeconomic environment we envision,” said McVey and Allouani.

As such, McVey and Allouani urge investors to reexamine the traditional 60/40 portfolio construction model in order to protect their purchasing power and potentially enhance returns in this new environment. Specifically, they believe that investors should consider:

1. Enhancing the traditional 60% capital appreciation component by allocating 10% to private infrastructure and 10% to private real estate investments.
2. Rethinking the traditional 40% income component by allocating 10% to private credit investments.

According to McVey and Allouani, this 40/30/30 portfolio model materially enhances returns per unit of risk by incorporating assets that correlate positively to inflation and enable investors to capture the value of the illiquidity premium. Based on their analysis, the 40/30/30 portfolio performed better than the 60/40 model in most environments and especially during periods of high inflation, when it offered significantly less volatility and better returns than the alternative. It also did not materially dent overall liquidity.

“We think that increasing diversification to enhance portfolios so there are ‘more ways to win’ is important in the environment that we believe we are entering,” said McVey and Allouani. “Overall, our work shows that there is a significant opportunity to not only protect but also potentially enhance both the equity and fixed income sleeves of portfolio returns.”

Links to access this report in full as well as an archive of Henry McVey's previous publications follow:

• To read the latest Insights, click here.
• To download a PDF version, click here.
• For an archive of previous publications, please visit www.KKRInsights.com.

About Henry McVey

Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Investment Management & Distribution Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.

About Racim Allouani

Racim Allouani joined KKR in 2015 and oversees Portfolio Construction, Risk Management and Quantitative Analysis across KKR Private and Public Markets. Prior to joining KKR, he spent five years at the hedge fund of Lombard Odier as a senior quantitative portfolio analyst and risk manager, covering equity and credit long/short strategies. Prior to that, he was at Arden Asset Management, a fund of hedge funds, in the portfolio optimization group. Mr. Allouani also previously held positions at Deutsche Bank in equity research and Bank West LB in fixed income research. Learn more about Mr. Allouani here.

About KKR

KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com and on Twitter @KKR_Co.

The views expressed in the report and summarized herein are the personal views of Henry McVey and Racim Allouani of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This release is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and KKR, Mr. McVey and Mr. Allouani do not assume any duty to update such statements except as required by law.

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