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Private Markets as an Opportunity to Build Portfolio Resilience
Created Exclusively For MLD Wealth Clients
Designed to provide seamless access to institutional quality investment opportunities within global private markets, this Portfolio is custom built with the goal of providing stable income, positive long term real returns, and downside protection.
Amidst the ongoing market volatility and sharp sell-off in public equity markets in reaction to the Trump Administration’s LiberationDay Tariffs, any portfolio that wasn’t appropriately diversified across multiple asset classes is likely experiencing significant declines in value.
Portfolio resiliency, and the role that different asset classes and investment strategies can play in an overall portfolio, has once again come into sharp focus. When added to a traditional portfolio of public equities and bonds, a well constructed portfolio of private market investments may offer considerable diversification benefits, particularly during periods of heightened market stress and uncertainty, such as the environment we find ourselves navigating today.
In times of market stress, public markets tend to experience immediate and sharp price movements driven by changing investor sentiment, macroeconomic uncertainty, and rapidly declining liquidity. Private markets, in contrast, are priced according to company fundamentals and not shorter-term investor sentiment and market emotion. As Benjamin Graham famously said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Portfolio resiliency, and the role that different asset classes and investment strategies can play in an overall portfolio, has once again come into sharp focus. When added to a traditional portfolio of public equities and bonds, a well constructed portfolio of private market investments may offer considerable diversification benefits, particularly during periods of heightened market stress and uncertainty, such as the environment we find ourselves navigating today.
A review of market drawdowns
The chart below shows peak to trough drawdowns of the S&P 500relative to a hypothetical diversified private markets portfolio called the, Diversified Alternatives Allocation or DAA model,1 for the 17-year period October 1, 2007, to September 30, 2024.
The hypothetical DAA model includes allocations to private equity(30%), private debt (30%), real assets (10% infrastructure, 10% real estate, 10% farmland) and 10% hedge fund
This period includes the Global Financial Crisis (GFC), one of the most stressful periods in the history of financial markets. Over this period, including through the GFC, the S&P 500 suffered multiple corrections of more than 20%, including in March 2020 due toCovid-19, and the market sell-off in 2022 in reaction to rapidly rising interest rates.
During the GFC, the S&P 500 suffered a maximum drawdown of over50%. While certainly not immune to the severity of that crisis, theDAA model suffered a significantly lower drawdown of 20%. During the Covid-19 induced sell-off in March 2020, the S&P 500 suffered a drawdown of 20%, while the DAA model declined only 5%. And more recently in the 2022 market correction following aggressive interest rate hikes, the S&P 500 declined over 20%, while the DAA model barely declined in value.
The relatively more muted drawdowns experienced by the hypothetical DAA model could be attributed to the defensive characteristics of certain underlying asset classes that, when combined in the model, produced a compelling risk/return profile.In private credit, return of capital, interest payments and other forms of return are bound by a legally binding contractual obligation.
A well-diversified private credit portfolio focused on top of the capital structure investments in profitable middle-market companies will continue to pay attractive cash flow yields to investors, even during periods of market stress.
Real assets, such as core real estate, infrastructure and farmland, are tangible assets that play essential roles in daily economic activity. They provide significant linkage to inflation due to the nature of the underlying investments. Their unifying characteristic is that investors have access to defensible earnings streams, which often have an inflation-linked component, and/or storage of value via a direct connection to a physical asset. Private infrastructure, for example, given the essential nature of infrastructure assets and the durability of their underlying cash flows, has proven to be a particularly resilient asset class in times of economic stress.
Conclusion
While it is unclear how long the current tariff uncertainty will last, and how much further the public equity markets might correct, history has shown that, notwithstanding their differing liquidity attributes, a well-diversified private markets portfolio. A well-diversified private credit portfolio focused on top of the capital structure investments in profitable middle-market companies will continue to pay attractive cash flow yields to investors, even during periods of market stress.
has been resilient in periods of market distress. Private market investments might offer the potential to provide an important ballast in a well-structured investment portfolio, that includes allocations to traditional equity and fixed income holdings to help manage volatility and enhance diversification.