Page 38 - DIY Investor Magazine | Issue 31

IS YOUR PORTFOLIO AN ‘80S THROWBACK? Private equity investment trusts could add valuable diversification to private investors portfolios, which often still resemble old fashioned 60/40 strategies... Theories on how to build a portfolio abound in the world of professional investing. As we wrote in an editorial earlier this year, in the 1980s investors adopted the 60/40 equity and bond split as shorthand for a well-diversified portfolio as fixed income became a less reliable beast. Since then, professional investors have amalgamated a broadening range of asset classes into their portfolios as they looked to international equities, real estate and even hedge funds as new sources of diversified returns. However, for individual investors, it can often be difficult to discern what presents a genuine, new frontier of opportunity. As a result, many portfolios are still dominated by the 60/40 model of allocating to domestic equities and fixed income. While there is no harm in pursuing this approach, it does mean that individual investors could be missing out – on returns, on portfolio diversification and, potentially, on future growth. ‘EXPOSURE TO PRIVATE, NON-LISTED COMPANIES BACKED BY PRIVATE EQUITY FIRMS, A FOCUS ON FUNDAMENTAL VALUE CREATION AND A SOURCE OF DIVERSIFICATION.’ UNTAPPED POTENTIAL One area that is treated starkly differently by private and professional investors is private equity. After seeing the sector outperform public equity markets over multiple cycles, some active UK pension funds have up to 10- 15% of their portfolios allocated to private equity (and in the US this sometimes climbs to over 20%). Meanwhile, the MSCI Private Investor Indices group private equity with other alternatives, such as infrastructure, hedge funds and renewables, which each have very different risk and reward profiles. This is reflective of the relative lack of attention paid to private equity by private investors. Typically, this is attributed to the challenges in accessing the asset class. Professional investors, such as pension funds, are able to invest through private equity limited partnership funds whose minimum investment puts them far out of reach of (most) individual investors. However, in the UK there is an accessible and relatively underappreciated route to investing in the sector. Listed private equity trusts (LPE) offer investors exposure to a portfolio of institutional-level private equity companies through their publicly traded shares. Although the way these trusts invest varies, at their core they all provide investors with the same benefits: exposure to private, non-listed companies backed by private equity firms, a focus on fundamental value creation and a source of diversification. ‘PRIVATE EQUITY FUNDS OWN AND THEREFORE ACTIVELY CONTROL THEIR PORTFOLIO COMPANIES AND THEIR VALUE CREATION’ DIY Investor Magazine · Nov 2021 38