Investors putting too much faith into private investments are potentially risking too much and will face significant drawbacks in the future, according to Christopher Rossbach, manager of the J. Stern World Stars Global Equity fund.
People are turning to private equity because they are worried about the current backdrop with listed stocks, but “everybody who is stampeding into private investments is going to face significant issues going forward,” he said.
On the contrary, those who have the patience to remain invested in public markets for the long term and “focus on the fundamentals” are better placed to preserve and grow capital over time.
Rossbach’s comments come as more people are turning to private markets for different reasons. One is for the prospect of higher returns, which is increasingly important against higher costs of living and an environment where making a return in public markets isn’t as easy as it used to be.
“People’s underlying needs have not changed. To preserve and increase the value of assets in real terms is of huge importance,” Rossbach said.
But today the 60/40 balanced portfolio doesn't work anymore because “no matter whether you're now generating real returns – 5% from government bonds or from high-grade corporate bonds – it's just not enough to offset inflation” and face the real-world rise in costs.
While the cost-of-living crisis is squeezing lower earners, in fact, things are more expensive than ever for the very wealthy too, Rossbach noted. He pointed to the Cost of Living Extremely Well index, an annual computation published by Forbes that tracks the price changes of a basket of luxury goods and services. It also includes a measure of eating out.
“The stated price of a pizza Margherita at Pizza Express here in the UK has seen a 6.7% annual inflation”, he said. “Getting 6.7% returns is really hard”.
“Investors are told that stocks are either risky or overvalued. It's [seemingly] never a good time to buy them. Markets are also fully valued and very highly concentrated. It is a very difficult environment”.
The private industry is also increasingly opening up to the public, with policymakers encouraging greater participation in illiquid assets through vehicles such as the long-term asset fund (LTAF), recently approved for inclusion in ISAs.
While the government hopes this will boost long-term investment in the UK economy, Rossbach cautioned that investors risk surrendering one of the most valuable tools available to them: liquidity.
“Lots of stakeholders are pushing people into private markets,” he said. “They're telling us that privates have significantly higher expected returns than any other asset class, including public equities.”
Yet, in practice, the trade-off is stark. Rossbach reported of an asset manager who had higher returns on private debt than on private equity, which worried him.
This tension between perceived opportunity and real-world risk has been a theme across the LTAF debate.
Aberdeen, in a paper released last month, called for greater transparency and standardised reporting to help investors understand how private assets are valued.
Nalaka De Silva, head of private markets solutions at the firm, said: “It’s no surprise that attention has turned to the benefits private markets can offer. But the risks entailed are very different and we are not suggesting that traditional portfolios blending investments in equities and bonds should be replaced.”
Others, including Fundcalibre managing director Darius McDermott, argued that listed investment trusts already offer a tried-and-tested means of accessing such assets, without imposing redemption delays.
Rossbach’s answer to the harsh environment is not in moving more money into private markets but in recognising their enduring advantages for long-term investing.
“We do not think, and you can see it in our performance, that volatility is a risk for long-term investors,” he said. “If you're an individual investor or a pension saver, which all of us [with a workplace pension] are, depending on age, we can't even access ISAs or pension funds for five, 10, 25 years. Why is volatility risk?”
People should think it through in terms of the liquid, safe, proven asset class that public equities can generate and increase assets for whatever the purpose is.
“Be very wary about taking additional risk in this environment, where there's so much of it already,” he warned.