20% of portfolio should be in absolute-return strategies – Blackstone’s Joe Dowling

The ideal portfolio mix should have at least 20% allocated to absolute-return strategies, Joseph Dowling, senior managing director and global head of Blackstone multiasset investing, said in an exclusive interview in Singapore.

“You can take it from whichever side you want to, depending on your risk level. It's usually 60 equities, 40 bonds. If you wanted to, you can take 10 from bonds and 10 from equities — that’d be 50-30-20,” he said.

“Some investors would take it more from equities. Some would take it more from bonds. It depends on your risk tolerance,” he said.

Dowling leads the management of an $80 billion multiasset portfolio at Blackstone, and counts endowments, foundations, families, pension funds and other institutional investors as clients.

Before joining Blackstone in 2021, he was chief investment officer, then CEO of Brown University’s $6.6 billion endowment fund.

The Blackstone multiasset investing portfolio, known as BXMA, comprises three broad categories — the $50 billion absolute-return strategy, $10 billion in multistrategy and $20 billion for total portfolio solutions, which is made up of six portfolios for families.

Investors have received a wake-up call to the importance of absolute-return strategies as a diversifier in portfolios, especially after 2022 when bonds and equities became positively correlated and investors began to worry they might not see the same growth in the stock market that they had over the past few decades, Dowling said.

“I think about AR and multistrategy as a tool for CIOs at pensions, endowments and foundations to use in their asset allocation to optimize returns,” he said. “Were investors interested in absolute return when the stock market is going up 25% a year? They go, ‘why am I in absolute return? I should just be in equities.' This environment has been a wake-up call.”

“I think what’s important is the way we view the world. There were some historical correlations between stocks and bonds where they were uncorrelated, which was the premise of the 60/40. If you actually look back and look at the data over 50 years, they’re correlated about 66% of the time. So what we’re doing is adding something to your portfolio that’s a diversifier, and that will make it more stable,” he said.

With heightened volatility and high valuations, today’s market environment calls even more for the inclusion of absolute return in portfolios, he said.

The cyclically adjusted price-earnings ratio is currently at 35 times the average earnings of past decade, which implies a return of less than 3%, Dowling said. “There's a lot of volatility and uncertainty. Absolute return counters these risks,” he said.

Even as the Federal Reserve has started cutting rates, Dowling said he would not make changes to the absolute-return portfolio because it is completely uncorrelated.

“We don't need a crystal ball because what we've done is taken all these different strategies and made sure they're uncorrelated. We’ve put them in the portfolio and sized them accordingly so we have the benefit of all those strategies working together.”

The best-performing endowments and foundations have a large exposure to alternatives, but their biggest challenge right now is the slowdown in distributions from private equity and venture capital investments, he added.

“If we look at the facts, the best-performing Ivy League endowments have over 60% of their portfolio in alternatives,” he said.

Harvard University endowment, for instance, had $50.7 billion in assets as of June 30, 2023, of which 39% was in private equity, 31% in hedge funds, 5% in real estate, 1% in natural resources, and 2% in other real assets.

Similarly, the $40.7 billion Yale University endowment, which is well known for its heavy alternatives exposure, had $10 billion invested in venture capital, $10 billion in leveraged buyouts, $5.4 billion in marketable alternatives and $4.8 billion in real assets, as of June 30, 2023.

However, the biggest challenge facing endowments in today’s market environment is distributions, he said.

“Distributions from private equity, venture and growth have been very slow… Most of them have a 5% or less payout every year. Rates coming down will help as more deals get done. Blackstone’s President and Chief Operating Officer Jon Gray uses the size of his bag when he goes home on the weekends as an indicator (of deals in the pipeline) — he’s carrying two bags now vs. one,” Dowling said.