Market Correlations Lead Investors to Private Assets

As globalization has increased over the last several decades, it has become apparent that the portfolio diversification benefits from investing in different worldwide stock markets has diminished. World economies are now highly interdependent, although this trend may slow as supply chain security considerations become more important in the wake of COVID-19 and geopolitical concerns.

Whatever the future may bring however, it is clear from stock market correlations over the last 15 years that most major stock markets move in tandem as index correlations generally fall in the range of 0.7 to 0.9 as shown in the chart below.

Equity Index Correlations from 2007 to 2021

The degree to which markets are correlated is always most noticeable in times of crisis, when almost all markets around the world fall together, offering little protection to advisors and their clients.

To deal with this issue, larger institutional investors have increasingly turned to private assets strategies in an effort to gain broader diversification and lower portfolio volatility.

As shown in the following charts, private assets such as private equity, private debt and real estate usually provide similar or higher returns than publicly traded assets with lower volatility.

Canada Pension Plan Investment Board (CCPIB) has invested approximately 50% of its portfolio in private assets on behalf of Canadians. The benefits of this approach were evident at the beginning of the global pandemic in March 2020 as CPPIB’s Q1 2020 investment return was only a modestly negative -3.7% as compared to -21.5% for the TSX and -13.9% for global equities.

Despite the benefits of investing in private assets, high-net-worth investors and their advisors have historically faced several challenges in trying to implement an institutional-caliber private asset program:

• Segment and Sub-Segment Diversification: to reduce risk, multiple investment allocations are required across and within each private asset segment including real estate, private equity, venture capital, private credit and infrastructure
• Geographic Diversification: diversification across geographies within each segments is also important
• Minimum Investment Requirements: most institutional private asset managers require investments of at least $2 million to $5 million per investor which makes diversification challenging unless an investor has an extremely large portfolio
• Liquidity: most private asset funds are structured as closed end vehicles and investment terms can be as long as 10+ years
• Contributions and Distributions: investments in private asset funds are often made via multiple contributions over an initial three to five year period with returns of capital coming periodically over the fund’s life which makes cash flow budgeting difficult for most individual investors
• Registered Account Eligibility: private asset funds are usually not eligible for RRSPs, TFSAs, etc.

Fortunately, there are now solutions for high-net-worth investors who seek access best-in-breed, diversified private asset portfolios. Open-ended fund vehicles offer diversification across multiple private asset classes in partnership with top-tier global managers. Such funds provide investors with registered-account eligible, immediate turnkey access to private markets with low minimum investment sizes and periodic redemption rights.

Consider the Bridgeport Alternative Income Fund and the Bridgeport Private Equity Opportunities Fund for your clients. The Funds provide exposure to thousands of assets across multiple sub-segments within private credit and private equity, are registered account-eligible and offered via Fundserv.

For more information, contact us.