The 60/40 stock and bond mix has long been the industry standard for individual investor portfolios. But it may not be the risk/return profile that cemented its legacy. And it could change as access to new investment areas improves.
Large minimums, complex tax reporting, liquidity constraints and longer time horizons combined to prevent many high-net-worth and mass affluent investors from gaining access to the private markets and alternative asset classes. This left individuals and their advisors little choice than to optimize a portfolio with the equity and bond strategies available to them.
However, new fund structures are democratizing private markets. As they do, high-net-worth portfolios could look a lot more like those of institutional investors.
The Institutional Portfolio Evolution
Private market investments have long been a staple of institutional portfolios. Pensions and endowments, generally, have private markets allocations of 10%–20%, according to the McKinsey Global Private Markets Review 2021.
It's hard to argue their decision. Our research found that private equity and private credit have outperformed global public equity and credit markets respectively 19 of the last 20 years. They've also offered institutional investors diversification benefits and access to a much larger investable universe than public markets, where the number of publicly listed companies has fallen by more than 30% over the last 20 years, according to research by Professor Jay R. Ritter of the University of Florida.
Given some of these potential benefits, individuals may want to take a page from the institutional investors' playbook.
In recent years, private market managers have sought to address some of the structural barriers that prevented affluent clients from accessing the asset class. A new fund structure — often called an evergreen fund — takes aim at several of the impediments. Each fund has its own nuances, but some of the issues that evergreen structures seek to address include:
