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Says public assets will probably offer better returns

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High fees create big hurdle to returns in private assets

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Private markets have boomed as investors look to diversify

By Tommy Reggiori Wilkes and Oliver Hirt

ZURICH, Oct 16 (Reuters) - Clients should be wary of the

craze for private markets because the "hangover phase" facing a

sector pumped up by low rates and high fees will leave it

lagging the returns of public equities, the CIO at Swiss private

bank Julius Baer said.

Investors have poured money into areas including private

credit, private equity and infrastructure to chase higher

returns and diversify their portfolios.

Increasingly, high net worth individuals are being targeted

by asset managers who see them the next frontier, given some

institutional investors such as pension funds have exhausted

their capacity for "alternative assets".

Yves Bonzon, chief investment officer at Switzerland's

second largest private bank, said the likelihood interest rates

will stay relatively high, the misallocation of capital and the

amount of money already in private funds meant "the conversation

is changing".

"There are two main questions we get from clients at the

moment. One, should I buy an S&P 500 ETF (Exchange Traded Fund)?

And then afterwards, what is the rationale for private assets in

my portfolio?," he told Reuters in an interview at Julius Baer's

office in Zurich.

"Every time something goes up so fast, you want to ask

yourself the question are these assets producing returns that

are very competitive? The returns today are probably in favour

of public assets," he said, adding that after a long party

private markets were in the "hangover phase".

Bonzon estimated the fees charged by private equity and

other less liquid assets account for about 6% of invested

assets, creating a significant hurdle to beat before returns can

be compared with listed stocks.

Institutional investors like private assets because they can

smooth out the volatility of public stock and bond values, given

private funds do not have to mark-to-market assets as regularly.

"If you are looking at your portfolio only once a year, an

MSCI World ETF might be a more compelling investment option,"

Bonzon said.

Analysts say that returns in global stocks have been largely

driven by a surge in the biggest tech companies, known as the

"Magnificent Seven," creating sigificant concentration risks

that private markets could help address.

Julius Baer, which manages 474 billion francs ($550 billion)

in assets, had a tumultuous start to 2024 when its CEO left

after the bank reported large losses on loans to collapsed

property giant Signa.

A new CEO, Goldman Sachs ( GS ) partner Stefan Bollinger,

starts early next year.

($1 = 0.8612 Swiss francs)