Investors should consider private equity allocations in their portfolios to boost returns and enhance the universe of stocks available for them to hold, a global asset manager has said.
“Private equity by nature is just the ownership of a company that is not listed on a stock exchange,” Schroders Australia alternatives director Claire Smith said.
“Regardless of where investors’ expectations are for the next five years, what has been proven over the last 20 years is that you can earn an illiquidity premium, as we call it, in private markets.
“Obviously there is no such thing as a free lunch in finance, so you don’t get [the better returns] for no trade-off and what you are trading off in private equity is a bit of liquidity.”
In addition to the higher returns private equity offerings can generate, Smith said there are other factors that should encourage investors to consider holding shares in unlisted companies.
“There are a lot of listed companies that are being taken private at the moment. {For example], Sydney Airport [and] we’ve also seen [organisations] like Citadel and Bingo, so if you’re just accessing equities through listed markets, actually the universe of stocks that you are going to access through that channel is reducing,” she noted.
According to Smith, former treasurer Peter Costello has recognised these trends and has already committed to increasing the portfolio weighting given to private equities in the Future Fund.
The manager warned investors about a return expectation gap, particularly regarding yield, it has recognised after conducting its global investor study for the current year.
To this end, Schroders found the average minimum level of income Australians would like to receive on their investments is 8.7 per cent a year.
“In our view this is somewhat unrealistic given the environment of low rates we currently are seeing,” Schroders Australia chief executive Sam Hallinan said.
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