Wealth managers ditch bonds and dive into private markets

Wealth managers have ditched bonds and turned to alternative investment strategies as low yields and low growth expectations prompt a search for higher returns outside of traditional asset classes.

A new Bfinance survey found that 61% of wealth managers have increased their allocation to private market strategies over the past three years by shifting capital from fixed income securities. However, around 66% also increased their equity allocations.

The use of private equity was motivated mainly by a desire for diversification and the capture of illiquidity premiums. But, according to Bfinance, some respondents also drew attention to the benefits of these strategies for changing customer behavior, as they encourage a longer-term, more patient approach. Currently, 60% of wealth managers use private equity.

Bfinance interviewed 120 wealth managers worldwide, 45% of them from Europe. Together, the companies manage over $1 billion in assets for their high net worth clients.

Over the next two years, these companies plan to continue shifting their allocation in favor of alternatives. While 52% said they would increase their investments in private markets, 41% are also considering more liquid alternatives.

This coincides with a slowdown in the transition to passives. According to the survey, 50% of wealth managers have increased their exposure to passive strategies in the past three years, but only 21% plan to do so in the next two years. About 11% expect to cut it.

Of those not currently using private markets, a quarter are actively considering entering the space. A third told Bfinance that he would be interested in doing so but that the obstacles, including regulatory constraints, are too great.

Currently, more than half of those investing in private markets do so through feeder fund structures, which helps remove some of the barriers.

“We use feeder funds to access funds whose minimums are too high for our clients. We usually either try to set them up ourselves or have the fund do it so we don’t have to pay an extra layer of fees,” said one wealth manager in the survey.

Dolores W. Simon