PE Diversification Benefits Questioned by Man Numeric
Portfolio managers at Man Numeric, the Boston-based quant hedge fund subsidiary of the $151 billion publicly traded alternatives giant Man Group, compared sector concentrations and exposures within US private equity and buyout funds to those of the broader S&P 500 index in their latest “Views From The Floor” market commentary.
They stated that because this year’s US stock market surge has been fueled primarily by a small group of AI-focused mega-cap tech companies, several industry participants have promoted private equity as a potential portfolio diversifier for allocators.
“While private equity does indeed provide exposure that naturally does not overlap with the handful of mega-cap US tech stocks dominating public markets today, we do not believe this necessarily warrants a leap into this much more expensive and less liquid asset class,” Man Numeric’s senior client portfolio manager John Lidington and portfolio manager Nina Gnedin wrote in the commentary.
According to Man Numeric data, IT businesses are the largest sector in both the S&P 500 (28.1%) and the greatest sector weight within private equity funds (26.2%).
“There are other ways than PE to achieve genuine diversification from broad-market indices that are also cheaper and more liquid,” they added.
Lidington and Nina Gnedin cited various public equity indices with constituents that do not overlap with the S&P 500 and that have “significantly less” concentration and “meaningfully different exposures” to the index. It also discovered that US buyout funds have a “significantly narrower industry profile” than the most prominent large-cap and small-cap US equity indices.
With weights of 11.3% and 18.3%, respectively, software and services, which fall under IT, are the largest industry group in both the S&P 500 and buyout funds. The Russell 2000’s weight in software and services businesses, on the other hand, is a fraction of buyout funds’ weight, at 6%, according to the report.
It warned investors: “If one is trying to diversify away from the narrow tech leadership of the S&P 500 Index — acknowledging that not all top market drivers year-to-date are officially classified as information technology — then simply moving down in market cap to the Russell 2000 Index isn’t a bad place to start, as information technology is the fourth largest sector in the Russell 2000 Index at 13.5% weight.”