A 10 percent allocation to any one of five private market asset classes lifted the mean annual Sharpe ratio of a modelled target-date fund above an equities-and-bonds baseline over a 40-year accumulation period.

Private markets in retirement plans: Returns, risks, and the importance of plan design, published in September by the CFA Institute Research and Policy Center, ran 10,000 Monte Carlo accumulation pathways for a stylised defined contribution plan using US-dollar return data from 1 January 2010 to 31 December 2024.

Raymond Ka-Kay Pang, PhD, senior researcher at CFA Institute, and Fan Yang, affiliate researcher at CFA Institute, tested private equity, private debt, infrastructure, real estate, and venture capital against a baseline fund holding only public equities and government bonds.

The baseline glide path held equities alone for the first 30 years before a linear shift to 30 percent equities and 70 percent bonds by year 40.

Funds carrying private assets held that allocation fixed at 10 percent throughout, ending at 27 percent equities, 63 percent bonds, and 10 percent private markets.

Private equity produced the highest average end accumulation value at US$1.489m, 13 percent above the baseline figure of US$1.316m and a difference of US$173,000 in nominal wealth.

Its mean annual Sharpe ratio reached 0.531 against 0.462 for the baseline, alongside the broadest range of end accumulation values.

Venture capital averaged US$1.35m and a Sharpe ratio of 0.493.

Private debt, infrastructure, and real estate each finished below the baseline on average end value, at US$1.297m, US$1.293m, and US$1.301m.

Each also cut the volatility of end accumulation values, to US$0.824m, US$0.812m, and US$0.823m against US$0.939m for the baseline, and each carried a Sharpe ratio above 0.5.

Fifth percentile outcomes for the three defensive assets sat between US$0.457m and US$0.458m, against US$0.414m for the baseline.

Splitting the 10 percent evenly between one growth asset and one defensive asset produced mixed results.

Read more @benefitsandpensionsmonitor