Think Beyond Stocks and Bonds

An Introduction to Multi-Asset Investing

By Daniel Phillips, CFA®, CFP®

All investment decisions have an opportunity cost. There is always an alternative that could have yielded a different outcome. And while it’s unhealthy to continually go through life second-guessing our own decisions, it is wise to occasionally ask ourselves: Am I missing the big picture? What have I taken for granted or overlooked?

Opportunity cost is usually highest when an investor completely overlooks an alternative or simply ignores part of the universe of options. In our experience, the most common opportunities investors overlook are in private markets. Typically, this is due to a lack of familiarity or education, or investors think these investments are inaccessible to them.

While some private market opportunities are limited to qualified investors, we are seeing an increasing number of options that are more broadly available. Every investor will be well served by asking the question: What are the merits and trade-offs of thinking beyond stocks and bonds and including alternatives—particularly private market strategies—in my portfolio?

Multi-Asset Investing is the term we use to describe expanding the investment universe beyond stocks and bonds. Private market investments include private equity, private credit, private real estate, and other real assets. Diversified private market portfolios will likely include exposure to each asset class and respective sub-strategies.

Today, we are several innings into a wealth management megatrend of individual investors embracing private markets. Reasons for this shift include:

1. Growth in private markets is cannibalizing public markets. This multi-decade trend continues. Companies are staying private twice as long as they did historically, and of the companies with over $100 million in revenue, 87% choose to remain private.1 Private direct lending is now a $1.5 trillion asset class and continues to take market share from commercial banks. And privately held real estate still dwarfs public REIT assets by a factor of ten to one.
2. High-quality private fund sponsors have now embraced raising capital from individual investors. For the last 30 years, the highest quality fund sponsors chose to work with institutions exclusively. Now that institutions are fully allocated to private markets, these asset managers have turned their focus to developing and distributing alternative investment opportunities to individual investors—a marketplace they had previously neglected. In the last five years, this trend has completely accelerated, and the number of high-quality sponsors now coming to market with competitive products has proliferated.
3. Evergreen fund structures are solving many of the challenges that have limited access to individual investors. Historically, it was difficult for individuals to get diversified exposure to private markets for many reasons, including high investment minimums; a lack of transparency, manager access, and diversification; tax complexity and reporting delays; and illiquid and unpredictable cash flows. In the last ten years, each of these challenges has largely been solved with the evergreen fund structure with limited trade-offs. Diversified funds with low investment minimums, simple K-1s or 1099 tax reporting, and upfront commitments with no capital calls are now widely available.
4. Private markets funds have provided significant diversification benefits to public portfolios. Private credit and private equity have provided a robust illiquidity return premium over broad public benchmarks while contributing to lower portfolio volatility. Since the story is less one-sided with private vs. public REITs, investors are likely to continue to express their preference for lower volatility over liquidity by favoring private institutional REITs.

We expect private markets to progressively become a larger part of most individual investors’ portfolios (up to 20%–40% of portfolio allocations) as their merits become better known. However, with this new opportunity set comes added complexity and risk. Private markets are by nature illiquid, and individual investors must be prepared to extend their time horizon if they expect to reap the long-term benefits. Old lessons remain but with new applications:

1. Every investment should be evaluated within the context of the portfolio management process. Private market investments should not be approached as a shiny new object, but as a tool that can serve your overall objectives given the timeline and plan for your portfolio.
2. Manager due diligence matters much more! Within efficient public asset classes, the spread between a top and bottom quartile manager may be 2%. In private markets, that spread can easily be 20%. Understanding the strengths and risks in a manager’s investment process and business operations is critical as these investment commitments cannot be reversed quickly or easily.
3. Don’t concentrate investments. This is the corollary to thorough manager due diligence. Practice asset class, fund manager, and strategy diversification. Position-size trending investments conservatively. It’s painful to make a wrong decision, commit too much, and be locked in.
4. Don’t time markets. Practice vintage diversification or dollar-cost average private investments over time. Take advantage of fund structures and strategies that build in vintage diversification (e.g., evergreen funds and fund of funds). Taking a “commit and forget” approach by only committing to a single manager is unlikely to deliver the best outcome and may be an unfortunately timed decision.

Public and private markets never cease to evolve, and neither should individual investors. As the investment opportunity set continues to change, we look forward to partnering with our investor clients in pursuit of their families’ objectives and well-being. BMSS Wesson Wealth Solutions is a registered investment advisor serving the complex financial planning and investment needs of clients referred by BMSS Advisors & CPAs. Contact: 205-982-5555 ▪ info@bmsswesson.com

1 Capital IQ (January 2022)