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On average, 90% of the variability of returns and 100% of the absolute level of return is explained by asset allocation.

As Roger Ibbotson noted—and his research supports—the asset allocation decision is a critical determinant of the long-term success of an investment strategy. We have long recognized the value of asset allocation, but too often limited the allocation to traditional investments. With the democratization of alternative investments, driven by product evolution, advisors can now expand their asset allocation to include a broader array of asset classes to achieve client goals.

This paper considers asset allocation and portfolio construction, and the impact of adding private market securities to a diversified portfolio. We will use a series of case studies to illustrate how to allocate to private markets and show what impact they have on a traditional portfolio. This paper addresses the following:

  1. How do private markets fit within the goals-based investing process?
  2. What is the appeal of private markets?
  3. What is the value of developing an illiquidity bucket?
  4. How should advisors evaluate the risk-reward tradeoffs?
  5. What does the addition of private markets provide a diversified portfolio?
     

Key takeaways

In this paper, we have revisited the asset allocation and portfolio construction process and focused on incorporating private markets. We examined the role and value of adding these versatile and valuable tools to client portfolios and evaluated some of the unique due diligence considerations. We discussed the merits of developing an illiquidity bucket and how they can benefit investors.

With product innovation making private markets more accessible to a broader group of investors at lower minimums, and with more flexible features, more investors can now access these unique investments. In fact, depending upon the investor’s wealth, liquidity needs and appetite for risk, investors can diversify their exposure to private markets.

Lastly, we used case studies to illustrate the impact of adding private markets to a diversified portfolio. The cases help illustrate the versatility of private markets in increasing returns, increasing income, and decreasing volatility, and improving the likelihood of achieving specific investor goals.