For decades, the 60/40 portfolio — 60% equities and 40% fixed income, typically accessed through public stocks, bonds, mutual funds, and ETFs — has been the prototypical investment strategy for those seeking both growth and stability. The idea being that when equities faced downturns, fixed income would provide a stabilizing counterbalance, ensuring portfolio resilience. However, market conditions have changed immensely over the last few years, challenging the efficacy of this approach.
Recent data has shown an increasing correlation between equities and fixed income. While these asset classes have, historically, demonstrated negative correlation, equities and fixed income have increasingly demonstrated positive correlation in recent years.
Presently, the diversification benefits of the traditional 60/40 portfolio are less concrete, prompting investors to pursue other avenues in search of that crucial balance.
Enter private markets.
To build resilient portfolios in today’s environment, investors should consider introducing assets from private markets, which can provide a range of benefits in addition to their potential for increased returns.
Diversification works best when assets are uncorrelated or negatively correlated with one another, so that if a portion of the portfolio decreases in value, others increase. Many private market assets have historically demonstrated low or even negative correlation to the traditional public equities and bonds found in most portfolios, making them a compelling diversification tool.
Furthermore, the inherent nature of private market investments — with their longer investment horizons and less frequent valuations — better insulates them from the short-term fluctuations that often trouble public markets. Combined with the vast array of investment opportunities across asset classes and strategies, private market investments can be a potent catalyst for both portfolio diversification and resilience.
Public markets are susceptible to the immediate whims of global events, news cycles, and short-term investor sentiments. Private market strategies, on the other hand, are designed to protect capital in times of turbulence. Private market assets can help investors reduce the overall volatility of their portfolios, especially as public markets become increasingly unpredictable.
Empirical evidence has supported this. For instance, during the Great Financial Crisis and COVID-19 pandemic, private equity demonstrated a much more muted response compared to public equity.
Reduced correlation to the volatility in public markets is one factor leading to a smoother ride for private market investors, but it is not the only piece to the puzzle — because they do not trade daily, private markets are subject to less frequent valuations and are therefore less impacted by short-term swings in market prices.
Many private market strategies also deliver returns to investors in the form of regular distributions, removing the need to time the market and helping to smooth out portfolio performance as equities move up and down.
Inflation and interest rate uncertainty can erode the real value of investments, disrupt long-term financial planning, and introduce unwelcome volatility into portfolios. Conversely, private markets may not be as susceptible to pricing pressures as publicly traded ones.
For instance, private real estate often performs well during inflationary periods. As prices rise, so can property values and rental income, providing a reliable hedge.
Moreover, private credit strategies such as floating rate direct lending have displayed durability through market cycles, benefitting from periods of rising interest rates and outperforming traditional fixed income in recessionary periods that may follow.
Certain private market investment structures may offer tax efficiencies for investors.
Private real estate investments, for instance, are typically made in Real Estate Investment Trusts (REITs), which are entities that own or finance real estate across a range of property sectors. REITs offer unique tax advantages because part of their distributions are treated as return of capital (ROC) — meaning they are tax deferred until redemption. For the remaining distributions that are treated as ordinary income, REIT investors receive a 20% reduction in their individual tax rates.
Private credit investments are also commonly facilitated through specialized entities, Business Development Companies (BDCs). BDCs often elect to be taxed as Registered Investment Companies, which are generally exempt from federal tax on distributed income at the corporate entity level. This benefit protects shareholders from double taxation.
