An allocation to private market assets in defined contribution (DC) pension schemes can be “a way to lower the overall volatility”, helping members “to stay the course”, according to Schroders Capital.
Jamie Woodall, solutions strategist, global opportunities, DC and retirement solutions at Schroders Capital, wrote that, while market volatility is “an inescapable reality”, private markets “could play a key role in smoothing the investment journey for investors and helping them to weather market storms”.
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He said that the asset class, which includes private credit, private equity, real estate, and infrastructure, has the ability to lower volatility, in part, as a function of diversification.
“Adding private markets to a portfolio mostly allocated to public stocks and bonds introduces new drivers of returns and performance,” he said.
Woodall added that, in addition, private asset classes typically exhibit low correlation to public markets, “meaning performance often diverges from what is happening in the public portion of a portfolio”.
One of the factors behind its “differentiated performance” is that private markets are typically valued less frequently than public market assets, which means “they don’t react to short-term noise in the same way that listed equities do, resulting in a natural smoothing of returns”, according to Woodall.
He said a recent study by Schroders Capital found that private equity outperformed public markets by an average of 4 per cent, net, over the 25 years to 2024, “highlighting the volatility-dampening potential of private market investments”.
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Woodall acknowledged that the inclusion of private markets assets in DC portfolios raises questions around transparency, liquidity and valuation lag, adding that these are “valid considerations”.
“Private market investments are less liquid by nature, meaning capital is typically tied up for longer periods. But in a DC default strategy – especially in accumulation – this long-term horizon can be an advantage rather than a drawback, giving investors the opportunity to access the potential illiquidity premium,” he said.
“Similarly, while valuation lags can mask the true volatility of private assets, this characteristic can also serve to smooth returns and reduce portfolio churn.”
Woodall noted that DC scheme members who witness steady performance “are more likely to stay the course” and, therefore, “remain engaged with their savings”.
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