Should we talk more about the role of private assets to engage a new generation of savers?
With pensions policy firmly back on the Westminster agenda, explaining the benefits of diversification and private assets could open up a new conversation with a wider audience about how investment works in practice.
Access to a variety of assets that present higher return potential over a long-term time horizon is clearly one advantage.
As part of a diversified portfolio, they provide new opportunities for savers to take a stake in familiar assets, such as real estate and infrastructure, as well as privately-owned companies not subject to the daily fluctuation of public markets and early-stage companies with significant growth potential that can drive future investment returns.
They are often the buildings such as homes, hospitals and schools that shape the world around us, digital solutions that enable us to instantly connect with family and friends across the world, exciting new technologies to lead the energy transition and biotech companies that are led by our brightest minds working hard to develop medicines and vaccines to enable us to live healthier and longer lives.
It’s a compelling investment narrative that should invite confidence about the transformative power of pension investment.
While private market assets under management has trebled in the past 10 years, we need to do more to explain what they actually are in reality, because they risk being perceived as an asset class that is out of reach for ordinary savers when the reality is very different.
The challenge is that, however well-grounded the investment opportunities are, clients need to understand what asset classes are available and, depending on their age and individual circumstances, what the appropriate level of risk should be.
We know through our research with the International Longevity Centre UK that people would rather take less risk, even if it means reduced returns and, crucially, this is shared across all age groups. At the same time, the majority of over-25s believe government support will reduce by the time they reach retirement age, putting a greater onus on individuals to make appropriate private pension investment for their future.
Advisers, therefore, have a crucial role in filling the information gap if clients want to understand the potential returns generated into their pension pot from private assets that have not always traditionally been included in diversified portfolios.
The phenomenal growth of private markets and the role they are playing to drive returns in many sophisticated portfolios, usually managed by large institutional investors, is giving clients access to asset classes that were simply out of reach 20 years ago. Again, the role of advisers is crucial.
By investing at scale, asset managers can achieve greater diversification across asset classes and geographies. This allows the use of a smoothing mechanism, so clients are less exposed to the short-term volatility shocks often experienced in public markets.
In my experience, there are two critical obstacles to overcome in order to allow individuals to access to private-asset investments.
Firstly, scale provides investment capability because private assets come in all shapes and sizes, so it requires a wide range of expertise to run these funds well. The second is providing daily trading and the ability for clients to add or take money out when they want.
This is where scale and the smoothing process is compelling for individual investors, as it manages the volatility between the underlying illiquid private assets and the quoted price of fund units.
The government’s pension review is shining a welcome spotlight on what we need to do as a nation to secure the financial futures of generations to come. Explaining the advantages of private assets, as well as the tangible economic and social benefits they bring to people’s daily lives is a winning combination to educate a broader audience of how their pension really works.
It might see a new generation think differently about their pension and go some way to boosting savings rates in the UK. That seems a sensible pursuit.
Clive Bolton is chief executive at M&G Life
