Over the past eight years, Last Word Research has carried out primary research into forward-looking fund selector investment sentiments. Every quarter, we have asked some of the largest wholesale investors across Europe and the UK what they expect to do with their allocations and weightings, and transformed this data into actionable insights.
Amid current jittery market conditions, one asset class has stood out from the crowd, thanks to its popularity and resilience to the downturn: private assets. As a result, in July 2019, we surveyed 136 fund buyers across continental Europe, the UK and Ireland, to discover more about their preferences, attitudes and buying intentions towards such asset classes.
What did they have to say?
Of all respondents surveyed, more than 80% said they were either actively looking to gain, or already have, exposure to private assets in their portfolios. Only one in five said they had no interest in private assets.
For three-quarters of respondents, the main reason for their interest in private assets was the potential for superior returns, while 70% liked their low correlation to mainstream strategies.
Although considered to be high risk by many, the high reward is tempting enough to encourage fund selectors to include private assets in their portfolios.
Of course, there are some concerns fund selectors face when considering private assets. Three-quarters of respondents reported that the limited liquidity of these funds was a main concern, which is unsurprising following the Neil Woodford fiasco that has been unfolding these past few months.
However, this is not the only concern reported by fund selectors’ clients. High fees and a lack of transparency in underlying holdings were also high on the list of concerns. Interestingly, the fact that the providers of private asset funds are not as well-known was not on many respondents’ radar, and only one in five said it was something they considered before choosing this type of fund.
Interestingly, these concerns almost completely tie in with what fund selectors look for when picking a private assets fund manager. While a lack of historical data is a concern of around three in 10 investors, over half of respondents reported that demonstrable historical performance was one of the most important factors they looked for when picking a fund manager.
It is not just historical data that is considered to be important when looking for a fund manager. Nearly all fund selectors agreed that a deep specialist knowledge was key when looking for a private asset manager. However, there is some good news for boutique fund managers.
Not only is not being well known not a main concern when considering private assets, fewer than 5% of respondents stated that being a well-known brand was of any importance in picking a fund manager.
Which funds?
We know why fund selectors love private assets at the moment, and we know what some of their concerns are, but what are fund selectors’ forward-looking buying intentions for the next 12 months?
Simply put, it is overwhelmingly positive among UK and Irish investors.
Private equity has taken the lead and is used by two-thirds of our respondents, with nearly 40% looking to increase their exposure in the next year.
Likewise, there is plenty of appetite for direct infrastructure funds, with three-quarters of participants looking to increase or maintain their current position. Private debt is in third place, with a quarter of fund selectors looking to buy.
It is not just our Q2 ’19 research into private assets that reveals a positive outlook. In October 2019, we surveyed roughly 450 fund selectors across Europe for their forward-looking investment sentiments towards all the major asset classes and strategies as part of our quarterly asset class research. This data showed that demand for illiquid strategies was still going strong.
Although only used by roughly half of our respondents across continental Europe, the UK and Ireland, those that have exposure are overwhelmingly positive, with almost all looking to either increase or maintain their allocations.
It is clear there is plenty of demand and a healthy appetite for private assets coming from wholesale investors. Despite some concerns raised by their clients, fund selectors seem largely positive towards these asset classes – and it will be interesting to see which fund managers can make the most of these opportunities.
This article was written by Lottie McGurk, a quantitative researcher at Last Word Research
