What the professionals do
Despite the turbulent financial climate, there are still assets in which a prudent investor can find shelter from these storms. Let’s take a look at what Swiss pension funds have done; after all, their sole raison d’être is to invest for a comfortable retirement, therefore they are experts.
Swiss pension fund asset allocation history since 2012
Aside from the increased exposure to foreign assets of all kinds, two trends are evident from the 2023 Swiss Pension Fund Study from Swisscanto. First is the near-constant annual reduction in fixed-income investments.
The second – and most important for the purposes of this study – is the equally-continuous annual increase in the weightings of real estate (initially devoted to Swiss assets but now increasingly composed of foreign assets as well), infrastructure, and so-called “alternative” investments, including private equity and hedge funds.
These trends have been observed in pension schemes across the developed world. For example, the chart below depicts what US pension funds have done over a similar timeframe. It is worth noting that, like their Swiss counterparts, fixed-income investing has been continuously reduced in favor of real estate and private equity, while public equity has also been slowly reduced on an annual basis.
US pension funds asset allocation history since 2001
Source: Equable Institute
The unambiguous message from the professionals is, therefore, that exposure to private markets – private debt, infrastructure, private equity, and real estate – is essential to creating a portfolio that will assure a comfortable retirement.
Not just professional pension managers, but the universe of investors in general, have increased their reliance on private markets (as shown in the chart below).
Assets under management trend of alternative assets, 2000-2022 (in USD billion)
Source: S&P Global
Overall, these investors in private equity, in particular, have not only reduced risks in terms of volatility, but also increased their returns compared to listed equities. Readers familiar with the Moonshot white paper on private equity have previously seen the chart below.
The net growth of a CHF 1’000 hypothetical investment in Cambridge Associates US Private Equity Index and Russell 2000 Index on 1st January 2012 (in CHF)**
** The chart is for illustration purposes only as neither the Cambridge Associates US Private Equity Index nor the Russell 2000 Index may be directly invested in as they are simply measures of the performance of its constituent securities.
For the comparison between private and public equity, the Russell 2000 Index was chosen as the benchmark for public equity, because of its high content of technology companies and younger enterprises. In general, this makes it a better benchmark than the S&P 500 or the main European market indices.
When it comes to real estate returns, a similar picture emerges, especially in Switzerland: a more-or-less steady rising trend that has been disrupted quite infrequently and with relatively minor damage to investors’ capital.
Swiss house prices since 2000
What these comparisons highlight is not just the substantially larger cumulative returns from private equity and real estate over the last several decades, but the more constant and progressive trend when compared to public equity markets.