Low-cost, publicly traded equities have offered excellent long-term returns and endured every industry trend.Tijana Martin/The Canadian Press
The cool kids are all going private. It’s the place to be.
I’m referring to the increasing popularity of and media attention on private debt and equity funds. David Swensen, the chief investment officer of Yale University from 1985 until his death in 2021, kick-started what became known as the endowment, or Yale, model. The difference? The Yale portfolio included a healthy amount of private assets and alternative strategies.
Over the past three decades, other institutional investors have been playing catch-up, to the point where U.S. endowments and many pension funds are now all in on private debt and equity. And now the next phase: Privates and alternatives are becoming available to individual investors, aided by U.S. President Donald Trump’s move this month to open retirement plans to illiquid assets.
The appeal of private assets is twofold. First, returns can be better (not guaranteed) by capturing an illiquidity premium. In other words, if investors are willing to sacrifice daily or even quarterly liquidity, fund managers are freed up to make bold business decisions outside the public eye and use more leverage, which reduces taxes and potentially leads to higher returns.
And second, private assets act as a diversifier. The underlying fixed income and equity investments are affected by the same economic forces as public securities, but the funds’ pricing mechanism lags the hair-trigger public markets. Holdings are repriced less frequently based on factors such as cash flow and recent transactions. Stale pricing tends to smooth out returns.
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This week, there was a good example of this. Ontario Teachers’ Pension Plan reported first-half results that meaningfully lagged other balanced portfolios and didn’t align with rising stock prices. The reason? Negative price adjustments to private assets, the same holdings that allowed OTPP to have a positive return in 2022 when bond and stock markets were weak and most portfolios were deep in the red.
These features are particularly appealing in light of today’s stock market volatility and a growing consensus that the U.S. market, everyone’s favourite, is expensive. The conclusion seems clear: Private is the way to go. Stocks are so yesterday.
A little love
Well, not so fast. Let’s give stocks their due.
Easy access: Buying or selling a stock is a few clicks away on your phone. No extra paperwork. No holding periods or redemption dates to remember. Your shares are completely liquid (with the possible exception of micro-cap stocks).
Opportunity: Access, when combined with price volatility, is a wonderful thing for investors who have an extended time horizon (a requirement for private investing). Unlike private funds that must put money to work a short time after they raise it, there’s no pressure for stock investors to buy. They can stand at the plate and wait for a pitch down the middle. They can take as many pitches as they want and not strike out. For long-term investors, volatility is a gift, not a scourge.
Price transparency: With public securities, your broker or investment manager doesn’t have discretion as to how and when stocks are priced. The marks are there for everyone to see. If you buy a stock or equity fund, you can be assured the price reflects the current news.
The amount of leverage is also in plain sight. It’s on the balance sheets of the companies you own, not layered through the portfolio.
Cheap: Access and transparency come at a modest fee. Trading costs are now de minimis, and professionally managed funds, whether active or indexed, range from cheap to reasonable. The expensive part of wealth management, which applies to all types of investing (especially privates), is the cost of advice.
Wealth creation: Stock returns are well above inflation for any period you want to pick. Not including this year’s strong returns, a half-Canadian/half-global portfolio has earned 9.8 per cent per annum since 1960 (a double every seven years), 8 per cent since 2000 and 9.9 per cent since 2020. All these time periods include years with negative returns.
Depending on your objectives, alternative asset classes such as private equity and debt, infrastructure and real estate can be great complements to your public holdings, as can alternative strategies such as long/short and market-neutral funds (I own two market-neutral hedge funds as part of my fixed-income holdings).
But low-cost, publicly traded equities should form the core of any portfolio. They’re simple, easy and transparent. They’ve offered excellent long-term returns and endured every industry trend that’s come their way, no matter how cool they were.
Tom Bradley is a co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.