Alternatives are increasingly becoming a compelling addition to a traditional 60–40 portfolio, according to Lonsec Investment Solutions’ chief investment officer (CIO), Nathan Lim. But success depends on manager know-how, particularly in private assets.
Speaking on a Netwealth podcast, Lim offered a useful way to think about the type of manager investors should back when entering this part of the market – and in his view, scale is key.
“This is a game for the big, you have to be big to do well given the sort of financial and commitments involved,” he said.
For instance, if a private equity fund makes an investment in a company, typically they are putting somewhere between $50 million to $200 million of capital to work, he said.
“So you have to be big to be able to deploy capital like that,” Lim said.
“Their ability to source deals and opportunities is paramount to their success because as the name suggests, all these deals, they’re not available on a public market for everyone to see. So their ability to source deals and the resources to support it absolutely must be considered.”
Last year, in addressing how alternative managers can help investors curb volatility and enhance potential risk-adjusted returns, Fidante agreed that size matters.
“The size and scale of the asset manager matter a lot for a variety of reasons, from ability to source and seize opportunities to providing liquidity to governance factors. In short, picking the right partner is key,” Fidante wrote.
Private markets under the microscope
Lim stressed that manager selection in private markets can really make or break an investor’s success, particularly given the dispersion in returns between the highest and lowest quartile managers is much wider than in public markets.
Pointing to recent research, he suggested the performance between the average top quartile and bottom quartile US private equity manager was nearly 20 per cent.
“So, that means the best manager and the worst manager, there was like a 20 per cent difference between the returns that they produced – that is about 10 times the dispersion you find with public market global equity fund managers where the difference between the best and worst manager was only about 2 per cent,” the Lonsec CIO said.
“I think it’s really important that when you’re looking at private markets, manager selection is really important. It’s very crucial.”
This view is echoed by other research agencies, with SQM Research recently placing the private credit sector on watch. Managing director Louis Christopher described it as a “precautionary measure” to ensure “appropriate oversight” of a growing asset class.
He also pointed to an increase in sector-related issues and recent statements from corporate and prudential regulators as key drivers of the shift.
Morningstar, too, told InvestorDaily last month it is finalising a new framework to evaluate funds without daily liquidity, with Lonsec also confirming to our publication that it recently enhanced its private markets model to capture risks such as valuation governance and portfolio concentration.
Ultimately, the message from research houses is clear: transparency and governance are under the microscope, and only managers with robust underwriting, diversification and risk controls will make the cut.
The recent furore around private capital was sparked by ASIC’s latest discussion paper, which chair Joe Longo called one of its “most important pieces of proactive work”, addressing the shift from public to “opaque” private markets.
