Insights from Ares’ Global Head of Wealth Management

1. Private vs. Public: How can one effectively model private markets consistently alongside public markets in proposals?
2. Evidence: Limitations on short track records and lack of clear data in private markets
3. Consistency: Difficulties making consistent allocations across various asset classes and vintages
4. Education: The need to help end investors understand private markets as an alternative to overpaying for liquidity

Meanwhile, a few slides in particular seemed to capture the attention of our audience members, leading them to raise their cell phones to take pictures:

1. Illustrative model portfolios showing up to 50% allocations to private markets
2. Data demonstrating that even in more conservative 40% equity / 60% fixed income portfolios –88% of the volatility is driven by the 40% traditional equity exposure¹
3. Charts evidencing the incredible shrinking of the public equity markets² and the knock-on effect of more and more companies choosing to stay private

Pairing the observed challenges and areas of interest, a few interesting themes emerged as we collectively focused the day on discussing “game changers” and an “expanded toolkit,” as well as introducing educational resources to assist financial advisors along their private markets journey.

Game Changers

A traditional 60/40 portfolio of stocks and bonds (i.e., allocating by asset class) has worked for quite some time, but markets and wealth management have evolved and look different today than they have historically.

First, the “Great Wealth Transfer” expects to see ~$84 trillion change hands over the next 20 years. An aging population in developed economies remains the largest wealth cohort and seeks more predictable returns delivered in the form of income. At the same time, many younger (“Next Gen”) investors (and inheritors) seek above-average returns that do not rely solely on stocks and bonds³.

Second, we observe a secular change in interest rate policy and, paired with higher inflation, this elevates uncertainty. This comes amidst years of large cap stocks trading at top decile valuations and lack of diversification in public markets, which fuels heightened equity risk.

Finally, regulatory changes in the wake of Silicon Valley Bank will further the need for flexible capital.

Effectively Using an Expanded Toolkit

Given the speed and dynamism of markets today, an expanded toolkit becomes a critical resource to keep up. We believe private markets serve just that purpose, having demonstrated their ability to improve portfolio outcomes across market cycles⁴.

At AWMS, with the help of our in-house “Financial Advisor Solutions Team” of asset allocation specialists, we believe that in place of the traditional public-only portfolio, individual investors could benefit from investing upwards of 50% of their portfolios in the private markets utilizing risk-based diversification (as opposed to traditional asset class diversification). We like to call it 50/50 investing, and our research suggests it provides the potential for higher returns, greater total portfolio yield and greater diversification to smooth portfolio drawdowns. 50/50 investing provides an alternative to the compulsory premium investors historically paid for the privilege of having their entire portfolio liquid, even if unneeded.

A Partner for the Journey

The resounding feedback from our RIA partners who attended our event is that access to education, insights, tools and consultation make all the difference in helping them overcoming the challenges.

Our RIA Private Markets Day represents just one component of AccessAres – Ares’ educational platform for the financial advisor. These initiatives, combined with support from our Financial Advisor Solutions Team, reflect our commitment to helping wealth advisors embrace private markets and incorporate them strategically into a durable portfolio approach with scale across their practices.