South Africans have tended to have investment portfolios of around 60% equities and 40% bonds. But in our low return world, this is limiting both their returns and investment diversification.
As listed stocks struggle to give returns of Consumer Price Index (CPI) plus 3%, we are seeing an asset class allocation evolution towards private market assets, also known as alternative asset investments. Private markets assets include private equity, private debt, real estate and infrastructure.
Globally, investors are allocating up to 40% of their portfolios into private markets, depending on their personal investment objectives. The main reason is to achieve an effective portfolio diversification strategy.
South Africa is starting to join the trend as more institutional investors shift allocations to private markets in the hunt for higher returns and to diversify portfolios away from traditional markets.
Private markets offer exposure to a broader range of industries and geographies.
Yale University’s Investment Office has increased its endowment fund allocation to private markets since 1998 to over 50%. Under a quarter of its portfolio is invested in traditional asset classes, and the rest in hedge funds. In the past decade, the endowment has earned an annualised USD 7.4% return. Yale says alternative assets are, by their nature, less efficiently priced than equities and bonds, which allows for the exploitation of market inefficiencies through active management.
South African regulators have provided carefully thought-through allocation limits to private market assets, found in Regulation 28 of the Pensions Fund Act and Board Notice 90 to the Collective Investment Schemes Control Act (BN90). Using these allocations as a guide, investors can allocate funds to private assets to complement, not replace, their investments in fixed income, listed equities and cash.
For example, if you were to consider allocating 60% of your investments into growth assets, funds like Ashburton Investments’ Private Equity, Mezzanine Finance and High Yield Credit could be suitable vehicles. Your 40% allocation to more stable returns could be directed into inflation beating investments funds like Ashburton Investments’ Stable Income, Diversified Income and Investment Grade Credit funds.