Thursday, July 31, 2014
Sunday, July 27, 2014
Thursday, July 24, 2014
A Preqin report says two-thirds of institutional investors are considering investing in private debt
A new research report from Preqin focuses on the rapidly growing private debt market within the alternatives sector, in particular on how institutional investors are finding value in undertaking financing roles that banks played until the recent financial crisis.
Institutional investors’ view on private debt market
The Preqin report surveyed 240 institutional investors to get answers to the following questions:
- How do institutional investors view the private debt market?
- Do they consider the segment as private equity, fixed income, or a hybrid of structures?
- Which fund strategies are most sought after?
- What do target returns tell us about risk appetite and performance expectations?”
Of note, two out of three institutional investors have invested in or are considering investing in private debt, and 78% of institutional investors look for direct lending funds when investing in private debt.
Details on survey results
Breaking down the Preqin survey data, more than two-thirds of institutional investors surveyed are active in or are considering investing in private debt. The reports says this suggests a “continued warming toward the wide array of private debt fund structures.”
The mean current allocation to private debt instruments among survey respondents was 5.6%, with a median allocation of 2.1%. However, 73% said they had no target allocation, “suggesting there may be opportunistic investing in the space, or the allocation is coming from broadly defined pools (Fig. 3)”.
Moreover, although a growing number of large public firms continue to launch exclusively debt-focused units, many institutional investors plan to allocate to private debt from fixed income (24%), private equity (20%) or general alternatives buckets (19%). The Preqin report mentions that one large U.S.-based pension fund said that they currently have “a private debt allocation of 1.8% of total assets, pulled from a private equity bucket.”
High returns targeted
Institutional investors expect to earn strong returns on their private debt investments. Preqin’s survey reported that aggregated target returns for private debt investors generally came out in a range of 8%-14%, with the size of the range “reflecting the variety of investment goals and expectations among LPs.” However, the report also noted that target returns for investors varied significantly by region, with North American investors looking for somewhat higher returns from their private debt portfolio at 9%-15% relative to European fund managers at 7%-13%).
Posted by Bud Fox at 5:38 AM
Saturday, July 19, 2014
Thursday, June 19, 2014
The wall of investment-management fees has been crumbling for some time. Wealthfront, another firm offering basic, pre-set ETF portfolios, last year said it would manage up to $1 million for 501(c) nonprofit organizations for free. Fees after the first million: 0.25%. The firm recently surpassed $1 billion in assets under management.
These efforts turn the typical model of the financial-advice business on its head. Advice is a scale business. The wealthier you are, the lower your fees. But it’s arguably the smalltime investor who could benefit the most from being freed of high fees.
In that regard, advisors often charge 1% or more a year to manage your money, on the theory that you won’t do it yourself, they can’t do it for much less and you can’t get a better deal elsewhere.
But if, like me, you don’t expect more than 6% annual long-term gains from stocks, an advisor who puts you in expensive mutual funds after laying in his own fee is siphoning away perhaps a third of each year’s expected return. Of course, he takes none of the risk. That’s reserved for you.
Compound lost returns over 20 or 25 years to see why your advisor drives a Jaguar and you drive a Honda.
Covestor’s program entails no management fee, just the underlying ETF expense ratios, which are measured in fractions of a percentage point, and trading commissions, which the firm estimates to be $20 a year.
So what about the portfolios? They’re about as basic and low-cost as the ETF market offers.Covestor Core Balanced Portfolio, targeting the Dow Jones Moderate Index, is invested in four funds from Vanguard Group and one from BlackRock’s (BLK) iShares.
That’s 33% in Vanguard Total Stock Market ETF (VTI), 24% in iShares Core U.S. Aggregate Bond ETF (AGG), 15% in Vanguard FTSE Emerging Markets (VWO), 13% in Vanguard FTSE Developed Markets ETF (VEA), and 5% in Vanguard REIT ETF (VNQ). Those ETFs’ combined weighted expense ratio is less than 0.08%.
This is no threat to the high-end financial advisor. But I expect to be a threat to the ones who charge smalltime investors 1% or more.
Posted by Bud Fox at 1:36 PM