Displaying items by tag: returns

A recent study indicates that private credit investments fail to yield significant additional returns once fees are factored in. Despite the allure of higher potential returns, the study suggests that the added expenses associated with private credit largely offset any potential gains. 

Researchers found that private credit funds typically charge higher fees compared to traditional fixed-income investments, which could erode investors' returns over time. This revelation challenges the notion that private credit offers superior returns, urging investors to carefully assess the costs involved before committing capital. 

The study underscores the importance of transparency and due diligence in evaluating investment opportunities, particularly in alternative asset classes like private credit. Consequently, investors are advised to weigh the potential benefits against the associated costs to make informed decisions in their portfolios.

Finsum: Alpha can be sucked up by fees but the real draw of private credit would be the uncorrelated returns.

The 2006 vintage of buyout funds remains etched in the memory of private equity investors who endured the global financial crisis (GFC), despite eventual recovery. Unlike typical fund vintages following a predictable "J curve," 2006 saw a deviation, marked by record capital investment before the financial markets' collapse. 

Recent fund vintages show alarming parallels to 2006 according to a report by Bain & Co, sparking concerns among limited partners about trapped capital and delayed returns. While historical challenges offer valuable lessons, today's private equity portfolios differ, with varied exit strategies and market conditions. 

Nonetheless, fund managers must proactively manage portfolios to generate distributions, prioritizing liquidity to satisfy investor expectations and secure future allocations.

Finsum: Lower interest rates could begin to free up capital for return distribution in 2024.

Investors have continued to pile into ESG funds amid a strong political backlash and new regulations, but what impact does ESG have on expected returns? In their book, Your Essential Guide to Sustainable Investing, Larry Swedroe, and Sam Adams presented the answer to that question from research that included studies from 2017, 2018, 2019, 2020, and 2021. They found that in both U.S. and international markets, ESG strategies’ returns were well explained by their exposures to the Fama-French factors of market, size, profitability, investment, momentum, and value; and multifactor alphas were not significantly different from zero. This indicates that any benefit from incorporating ESG strategies into a portfolio is already captured by other well-defined and known equity factors, meaning investors could not improve their Sharpe ratios by using ESG strategies. They also found that return and risk differences of ESG funds could be significant and were mainly driven by fund-specific criteria rather than by a homogeneous ESG factor. In addition, across four fund categories including index, active, exclusion-based, and non-exclusion based, the majority of observations displayed higher volatility than the broader market. Swedroe and Adams also noted that environmental and social scores did not contribute to performance. However, if investors want to have their cake and eat it too, then they should tilt their portfolios to sustainable firms with exposure to the Fama-French factors of size, investment, profitability, value, and momentum.

Finsum:In their book, Your Essential Guide to Sustainable Investing, Larry Swedroe, and Sam Adams presented evidence that ESG strategies don’t provide any return benefit unless they’re tilted to Fama-French factors of market, size, profitability, investment, and momentum.

While institutional investors are allocating more to alternative investments, recent analysis has shown that the asset class does not help boost returns. Public Pension Investment Update: Have Alternatives Helped or Hurt? was run by the Center for Retirement Research at Boston College (CRR). It found that the investment performance of public pension funds from 2001 to 2022 averaged only 5.9%, despite increasingly larger allocations to private equity, hedge funds, real estate, and commodities. CCR looked at the returns for broad indices of alternatives and traditional equities before, during, and after the Financial Crisis. It found that alternatives substantially outperformed traditional equities from 2001 to 2007; and other than real estate, alternatives lost less than equities during the financial crisis. However, Jean-Pierre Aubry, associate director of state and local research at CRR and the brief’s author wrote that “Since the crisis, the performance of alternatives has been more mixed, with private equity and real estate rebounding somewhat, while hedge funds and commodities continue to provide lower returns.”

Finsum: A recent brief found that alternatives have not helped public pension performance due to mixed performance since the financial crisis. 

According to a new PwC survey, eight in 10 investors plan to increase their exposure to ESG strategies over the next two years. PwC’s Asset and Wealth Management Survey, which was part of its Asset and Wealth Management Revolution 2022 report, is a global survey of asset managers and institutional investors. The survey sample included 250 respondents, accounting for a combined asset under management of approximately $50 trillion. The survey also revealed that asset managers are expected to increase their ESG-related assets to $33.9 trillion by 2026, up from $18.4 trillion in 2021. ESG-related assets are expected to grow at a much faster pace than the asset and wealth management market as a whole. ESG assets in the US are expected to more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026, while Europe ESG assets would increase 53% to $19.6 trillion. However, as demand for ESG products rapidly increases, 30% of investors say it’s a struggle to find attractive and adequate ESG opportunities due to a lack of consistent and transparent standards.

Finsum: A recent PWC survey revealed that 80% of investors are expected to increase their exposure to ESG over the next two years, while assets in ESG products are predicted to hit $33.9 trillion by 2026.