By Tommy Reggiori Wilkes and Oliver Hirt
ZURICH (Reuters) – Clients should be wary of the craze for private markets because the “hangover phase” facing a sector pumped up by low rates and high fees will leave it lagging the returns of public equities, the CIO at Swiss private bank Julius Baer said.
Investors have poured money into areas including private credit, private equity and infrastructure to chase higher returns and diversify their portfolios.
Increasingly, high net worth individuals are being targeted by asset managers who see them the next frontier, given some institutional investors such as pension funds have exhausted their capacity for “alternative assets”.
Yves Bonzon, chief investment officer at Switzerland’s second largest private bank, said the likelihood interest rates will stay relatively high, the misallocation of capital and the amount of money already in private funds meant “the conversation is changing”.
“There are two main questions we get from clients at the moment. One, should I buy an S&P 500 ETF (Exchange Traded Fund)? And then afterwards, what is the rationale for private assets in my portfolio?,” he told Reuters in an interview at Julius Baer’s office in Zurich.
“Every time something goes up so fast, you want to ask yourself the question are these assets producing returns that are very competitive? The returns today are probably in favour of public assets,” he said, adding that after a long party private markets were in the “hangover phase”.
Bonzon estimated the fees charged by private equity and other less liquid assets account for about 6% of invested assets, creating a significant hurdle to beat before returns can be compared with listed stocks.
Institutional investors like private assets because they can smooth out the volatility of public stock and bond values, given private funds do not have to mark-to-market assets as regularly.
“If you are looking at your portfolio only once a year, an MSCI World ETF might be a more compelling investment option,” Bonzon said.
Analysts say that returns in global stocks have been largely driven by a surge in the biggest tech companies, known as the “Magnificent Seven,” creating sigificant concentration risks that private markets could help address.
Julius Baer, which manages 474 billion francs ($550 billion) in assets, had a tumultuous start to 2024 when its CEO left after the bank reported large losses on loans to collapsed property giant Signa.
A new CEO, Goldman Sachs partner Stefan Bollinger, starts early next year.
($1 = 0.8612 Swiss francs)
(Reporting by Tommy Reggiori Wilkes and Oliver Hirt; editing by Barbara Lewis)