Harvard University’s endowment also offered words of caution, even as private assets helped it curb losses during the most recent academic year. Investors in this area have done well but it “may indicate that private managers have not yet marked their portfolios to reflect general market conditions,” said N.P. “Narv” Narvekar, Harvard Management Co.’s chief executive officer.
Yet assets like toll roads and airports can adjust prices with relative ease, providing an attractive hedge against inflation. A global index of listed infrastructure companies -- a rough proxy for their private peers – has suffered about half the losses of global stocks this year as the broader market crumbled.
Ports, Wind Farms
China Investment Corp.’s private deals have included a Turkish port and a fund launched with Goldman Sachs Group Inc. to invest in private US businesses. Norway’s $1.1 trillion sovereign fund is barred from private equity but has built stakes in renewable infrastructure that includes one of the world’s largest wind farms.
“Suddenly, diversification is paying off,” said Rich Nuzum, global chief investment strategist for Mercer Inc. He recommends large investors opt for “private debt over publicly traded debt and private equity over publicly traded equity,” given the likelihood of further monetary tightening.
Global macro hedge funds, which bet on the impact of political and economic events, are also faring well. A monthly index compiled by Credit Suisse Group AG tracking the strategy has jumped more than a fifth this year through August.
Infrastructure, hedge funds outperform traditional stock and bond portfolios
Australia’s $150 billion sovereign wealth fund has more than half of its assets in alternatives. The Future Fund increased global macro fund investments last year after correctly forecasting deglobalization and rocky geopolitics would spur inflation higher.
“There’s been an incredible enthusiasm for private market assets, in particular private equity,” said Ben Samild, the fund’s deputy chief investment officer. “The core factor that drives returns is there is a potential for a bit more excess return.”
That said, the structural shift to private assets that trade infrequently can also trigger severe, unintended consequences for markets. Investors are compelled to sell down their most liquid holdings – typically stocks and bonds – in times of stress, adding extra selling pressure on listed markets while unlisted assets are insulated.
UK Warning
This dynamic played out last month when British pension funds narrowly averted catastrophe. As the value of UK government debt fell alongside a controversial fiscal plan, the pensions were required to sell more of the bonds to stump up collateral to support derivatives positions. That fueled a gilt market rout that forced the Bank of England to unveil an emergency bond-buying package.
Investors are on alert. The risks of similar flare-ups could become even more extreme given the outlook for tighter financial conditions, war in Europe and sluggish growth in the world’s largest economies.
“Part of the problem is the fundamental issues of monetary authorities needing to rein in a wage-price spiral. Then there’s the Russia-Ukraine issue and all its impacts,” said Mercer’s Nuzum. “This year, we’re nine months in and it’s still looking ugly.”
--With assistance from Kyungji Cho, Takashi Umekawa and Matthew Burgess.
This article was provided by Bloomberg News.