As the pandemic creates havoc with markets and volatility spoils the attraction of traditional investment models used for portfolio construction, private equity is becoming a key driver of diversification and growth for advisers and money managers alike, a panel has heard.

The pandemic has brought so much uncertainty to markets that the way investors look at portfolios may never be the same. “It’s become almost cliché to say that we’re in an unusual period,” said Jonathan Armitage, chief investment officer at MLC Asset Management.

The pandemic environment will throw up a broad range of investment outcomes, Armitage explained, with returns not likely to come from traditional corners of the market.

“Investors are going to be looking at a wider range of investments to generate returns and those are going to be constructed perhaps in slightly differently ways than they have been historically,” he said.

Armitage was speaking during the first episode of Professional Planner’s new Investment Insight series held in partnership with MLC, along with investment consultant, Paul Saliba, founder of Evolutionary Portfolio Services and Serge Allaire, portfolio manager at MLC Asset Management. You can watch the full discussion here.

Indeed, financial advisers have “real concerns” about the traditional 60/40 portfolio, Saliba pointed out.

Saliba highlighted the sharp equity market drawdowns when the pandemic first hit in early March, which were accompanied by similar sell-offs in fixed income markets. This raised questions about whether traditional defensive assets are able to cushion drawdowns in shares, he said.

“All those things are concerning advisers, as well as where to get returns and yields,” Saliba added.

Adding to concern in traditional portfolio construction is that equity markets are becoming particularly concentrated, MLC’s Armitage noted, with investors often focused on a “small cluster” of tech and health companies.

“With markets so concentrated it doesn’t give the sort of diversification investors need to deal with a wide variety of potential economic and market outcomes,” he said.

Less sentiment, more diversity, less volatility

As a method of adding diversity to portfolios and reducing volatility, Saliba reckons the beauty of private equity is that it is value driven, rather than sentiment driven.

“Now there are different ways of determining that value and pricing it up but it is a representation of the value as opposed to the sentiment of the market,” he explained. “And that’s what smooths your returns.”

Private equity is a way of buying growth assets that don’t face the volatility of markets, Saliba continued, before drawing a parallel to illustrate why sentiment plays less of a role in private equity.