In a newly published outlook the $290 billion Citi Private Bank says that most investors are damaging their long-term returns because they are focusing on liquid assets far too much, those that can be cashed in quickly.
Serving clients with $25 million or more in assets, they believe that individual investors are looking to invest for many years should not be afraid to lock their money up for a longer amount of time and things like hedge and private equity funds, real estate and other asset classes that aren’t “liquid”.
“Have investors raised their risk tolerance too much while reducing their liquidity preference too little? The value of select less-liquid investments may be underestimated,” said the report, which was co-written by Global Chief Investment Strategist Steven Wieting and others.
It’s their opinion that these non-liquid investments have a higher potential for return, allow the investor greater control and also giving them the ability to participate in specific strategies that are unavailable in most public markets. It’s for that reason that they believe that non-liquid investments offer a premium and, for a balanced portfolio, add material value when used consistently.
They estimate that private equity and real estate will, in general, generate a 11.9% return annualized for investors over the next 10 years. While that’s slightly down from 2009, it’s still favorable when you compare it to the return for developed market corporate credit of 3.4% and developed market large-cap stocks of 6.7% over the same time period.
They go on to say that if the right manager is used the returns can be phenomenal, even with private equity firms that lock up investor funds for 10 years. Citi also said that even though hedge funds are less liquid, and usually lock up an investor’s capital for just the first year and afterwards offer quarterly redemption opportunities, they can still give very strong returns. They added that while credit hedge funds are a bit less attractive, European bond traders were still offering opportunities.
“Overall, we continue to see our clients underexposed to hedge funds relative to our 16 percent recommended allocation-a trend that we strongly feel needs to be addressed,” it said. “The current low-yield environment, with equity market rallies over the past few years, argues strongly for adding a source of uncorrelated returns to a diversified portfolio. Simply put, the easy money in the traditional markets is likely over.”
Citi also noted that less liquid residential and commercial mortgage-backed securities, as well as collateralized loan obligations, offered opportunities and that bonds are simply another way to exchange liquidity for potentially higher returns.