Strong equity market performance over the past decade made it easy for investors to remain locked into their traditional 60-40 portfolios, which delivered over 11% annually between 2011 and 2021.
Today, however, amid a volatile environment marked by expensive equity valuations, higher interest rates, tight credit spreads, and geopolitical concerns, investors allocated exclusively to traditional assets may be facing a bleak scenario: a potential breakdown in the negative correlation between stocks and bonds that would call into question the validity of the classic 60-40 portfolio.
Whether the stock/bond relationship has cyclically shifted or structurally changed remains to be seen. In the meantime, advisors are increasingly looking outside of traditional assets to find diversification and growth opportunities for clients.
Increasing Private Equity Allocations
Advisors working with high-net-worth investors are well versed in the potential growth and diversification benefits of allocating to private market strategies like private equity.
A long-term shift in market dynamics means there are fewer listed companies today versus 25 years ago, while surging private equity fundraising and deal activity has enabled private companies to remain private longer than in the past.
As a result, companies often experience their best growth periods before they go public, with the benefits of that growth accruing to private rather than public market investors.
Against this backdrop, high-net-worth investors are increasing their private market allocations, which are expected to top $1.5 trillion by 2025. The growing availability of private market strategies through fund structures designed for use by individual investors is helping to support this trend.
In fact, '40 Act registered funds, such as interval and tender offer funds, enable accredited investors with $1 million or more in assets or $200,000 in annual income ($300,000 with a spouse) to access private market strategies with investment minimums as low as $25,000.
In general, these investor-friendly structures do not utilize capital calls, issue 1099s instead of K-1s (substantially simplifying tax reporting) and often offer regular liquidity opportunities.
