UBS Wealth Management believes investors can hold up to 30 per cent of their portfolios in private markets as well as switching cash into fixed income.
In the firm’s Year Ahead 2025 outlook, it said it is “imperative” to put excess cash to work as interest rates are likely to fall next year which means it will achieve lower returns and investors will need to find durable sources of income.
It recommended switching cash into fixed income to lock in yields and dampen portfolio volatility.
“Switching cash into high quality fixed income can lock in yields and help dampen portfolio volatility. Deploying excess cash into equity income or balanced strategies can provide a more long-lasting source of return and increase the likelihood of beating inflation over the long term.
“We believe that central banks are poised to cut interest rates further in the year ahead and that returns on cash will fall. As such, we believe investors should position for lower rates by putting cash to work in investment grade bonds, diversified fixed income strategies and equity income strategies to sustain portfolio income.”
In bonds, it said actively managed funds could offer greater convenience and superior risk management than investors or advisers trying to manage single bond exposures themselves.
Meanwhile, it recommended an allocation to alternatives for diversification purposes and to enhance portfolio growth which could make up as much as 30 per cent of a portfolio. This could include private equity, private debt, private infrastructure and private real estate.
Private markets funds have grown in popularity this year, but there are concerns around their illiquidity and lack of transparency.
UBS said: “We believe that investors can consider replacing around 30 per cent of their public equity exposure with private markets, depending on the tolerance for illiquidity.
“In private markets, we like private credit, value-orientated buyout and secondaries including infrastructure, and thematically, we favour software, health and climate.”
Regarding illiquidity, it said a flexible line of credit can provide immediate access to funds without the need to sell assets, which reduces the necessity of holding cash.
Last week, Money Management wrote about how advisers could select a private markets manager, as they require different considerations to a listed manager. These include knowledge of their specialist area, expertise and experience of the management team, manager conviction, and portfolio diversification.
