I think weāre talking past each other a bit. The claim isnāt that itās directly valuable to overweight publicly traded private equity companies in oneās portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally oneās portfolio (if youāre trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isnāt public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitiveā¦ by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolioā¦
if you think public PE should perform similarly to PE broadly.
I think this might be another big ifā¦ though also one should be surprised if thereād be a big discontinuous jump in returns when going from non-traded to traded.
by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
Yes, I think that is true as well!
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it?
Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolio...
Hm, very possible I am thinking about this wrong, but itās pretty intuitive to me. After all, isnāt the ātrueā global market all investable assets, not just publicly traded assets? Itās the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.
I think weāre talking past each other a bit. The claim isnāt that itās directly valuable to overweight publicly traded private equity companies in oneās portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally oneās portfolio (if youāre trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isnāt public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitiveā¦ by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolioā¦
I think this might be another big ifā¦ though also one should be surprised if thereād be a big discontinuous jump in returns when going from non-traded to traded.
Yes, I think that is true as well!
This is what I was getting at by noting that PE should also be higher beta, so the risk-adjusted returns should not be higher!
Hm, very possible I am thinking about this wrong, but itās pretty intuitive to me. After all, isnāt the ātrueā global market all investable assets, not just publicly traded assets? Itās the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.