PCM Encore: The New Regime of Portfolio Construction

Over the past several years, market offerings have evolved considerably, with a wide variety of optionality across asset classes and strategies now available to non-institutional investors. While many managers continue to deploy a passive approach to wealth investing comprised of stocks, bonds, and other historically popular fixed income assets and public equities, PCM Encore is pioneering the wealth management space by focusing on the adoption of alternative assets as a key part of creating diversified client portfolios.

The Case for Alternative Assets: Breaking the “60/40” Mold

Today more than ever, clients are looking to shield their portfolios from market volatility stemming from macroeconomic headwinds, regulatory shifts, inflation, and other adverse market effects. For decades, this has meant maintaining a risk-adjusted balance of stocks and bonds – the “60/40” portfolio (60% stocks, 40% fixed-income assets).

In the past, stocks and bonds typically exhibited a consistently negative correlation, with stocks providing cyclical market exposure and vice versa. However, as measures of year-on-year CPI (consumer price index) inflation began spiking in 2021, the two have become highly correlated, effectively eliminating the benefit of allocating a large portion of an investor’s portfolio to fixed-income assets. When inflation rates remained below 3% prior to April 2021, there was largely no significant relationship between stocks and bonds; by December 2022, an over 6% inflation rate resulted in an exceptionally high 60% stock-bond correlation. Since then, stock and bond prices have continued to trend in the same direction, reducing traditional fixed-income assets’ ability to “cushion” losses from falls in stock prices. In fact, during calendar year 2022, many aggregate bond funds dropped nearly 15%, an almost equivalent amount to the drop in the US total market index, leading to a double whammy for investors.

Alternative assets provide diversification that helps reduce the impact of cyclical market events and broader macroeconomic factors. As of March 2025, data encompassing a suite of notable large-cap alternative investment funds (private credit, real estate, private equity, and infrastructure) shows that while the S&P 500 index was down 4.27% YTD, nearly every alternative asset class had gained at least 2% in value. This difference is even more apparent when tracking returns within a one-month period, where the S&P 500 index was down nearly 7% in value while alternative asset funds exhibited similar returns. These metrics support PCM Encore’s view that exposure to alternative investments is especially ideal during volatile market conditions where traditional indexes fall short.

Market downturns and subsequent macroeconomic policies have had the greatest negative impact on portfolios disproportionately comprised of traditional investments. The aggressive monetary policy adopted in the aftermath of the COVID pandemic followed by the subsequent reversal and raising of rates to combat inflation resulted in increased bond volatility – dragging down returns and reducing bonds’ function as a hedge against falling stock prices. Combined with historically low bond yields in recent years, the 60/40 approach to portfolio composition no longer serves the needs of families and individuals.

Why do we believe that the addition of alternatives provides value to portfolios? First, public corporations make up under 15% of all companies with over $100m in revenue. Without the inclusion of privates, investors are locking themselves out from a large swath of the investible universe. Furthermore, private investments and alternatives have additional levers for returns and downside protection. In today’s market, sophisticated investors recognize that yield is engineered through meticulous portfolio construction, and that dynamic investment structures play a crucial role in adapting to the new macroeconomic landscape. Private market offerings provide superior downside protection and shared upside by giving investors greater flexibility in liquidity preference and participation rights not seen in simple ETFs and other public market equities.

PCM Encore’s view is that true diversification must go beyond the small pond of traditional investments – it requires a bespoke approach to portfolio construction that includes private investments such as real estate, private equity, and private credit.

The Encore Difference: Our Strategies and Private Market Offerings

Each client has a unique set of wealth goals, and at PCM Encore, we put that belief into practice. Our clients are matched with customized teams who thoughtfully craft each portfolio. This includes our private markets offerings, including leading third-party funds and proprietary access to direct investments in private real estate, private equity, and venture capital. Not all fund managers are created equal, and this is especially true on the privates side, where information is often more opaque and complex. We have seen too many instances where investors don’t have a full understanding of the alternatives they are being placed into, with limited transparency around fund manager performance and hidden layers of fees. We at PCM review hundreds of fund managers and investment opportunities, screening for only the best ones to share with our clients.

Private Real Estate

The inclusion of real assets, such as real estate in an investor’s portfolio, yields several benefits, including serving as a hedge against inflation impacts, generating more predictable streams of income, and offering optionality for different clients’ personal risk appetites. While many investors today already have exposure to this asset class, our approach at PCM Encore leverages relationships with developers to provide our clients with greater oversight and diligence.

In 2023, we engaged in a strategic partnership with American Capital Group (“ACG”), a Bellevue, Washington-based real estate development and investment firm focused on the construction, management, and acquisition of residential assets through the United States’ Western region – introducing a large opportunity for our clients to gain direct exposure to top-shelf private real estate assets. ACG’s vertically integrated operating structure, which combines significant off-market property acquisitions with reduced costs through a fully integrated property development and management platform, has been proven to drive alpha across market cycles. As a recent example, ACG established a joint venture partnership with PGIM, the asset management arm of American life insurance company Prudential Financial, to invest in and develop apartment assets in Kirkland, Washington – a project we are helping bring to fruition and an example of PCM Encore’s ability to offer differentiated real estate asset exposure to clients.

Private Equity

In 2021, PCM acquired Hawx Pest Control (“Hawx”), a leading provider of commercial and residential pest control services across the United States as part of our proprietary private markets coverage and private equity strategy. The pest control industry is a notable example of a sector that is recession- and inflation-resistant, with service demand remaining consistent and proportional to the growth of the United States real estate market. Identifying companies that can weather market cycles and continue to produce returns is not only an expansion of our alternative investment offerings for our clients, but also a fundamental part of PCM Encore’s risk management and portfolio diversification strategy.

Beyond our proprietary investments, PCM Encore also retains a strong partnership with Graystone Consulting, the institutional wealth and investment management consulting business of Morgan Stanley. With direct access to their team, we can offer clients the best of both worlds: boutique family office investing combined with access to institutional expertise including Morgan Stanley’s alternative asset platforms, bolstering PCM Encore’s private market offerings.

These strategic partnerships and direct investments represent PCM Encore’s commitment to growing our private markets opportunities for our clients, employing our high-conviction standards and investment team’s wealth of experience in alternatives to ensure institutional-quality exposure. PCM Encore participates directly in each investment, meaning we approach each opportunity with exceptional diligence, and our own skin in the game.

The Future of Alternatives in PCM Encore’s Ongoing Strategy

PCM Encore is constantly scrutinizing the broader market landscape to identify the best opportunities for our clients and counterparties. We firmly believe that access to private markets will continue to play an increasingly large role in the wealth management space, but as of now, access remains fairly limited and opaque, and PCM Encore remains the leading provider of full-service financial planning and family office services that includes direct access to private investments.

The investing landscape has evolved considerably over the past several decades, with global crises, geopolitical uncertainty, and other macroeconomic shocks often setting in motion shifts in regulation and sentiment that can fundamentally change market structure. At PCM Encore, we understand the responsibility entrusted in us when managing our clients’ portfolios – we guarantee that our dedicated team remains ready to adapt.