Morningstar - Q2 2022 - 37

down an exact number for private equity's
correlation with publicly traded stocks. However,
several researchers have found evidence that
private and public equities generally tend to move
in the same direction. J.P. Morgan, for example,
estimates that a major private equity index has
had a correlation of 0.9 with publicly traded stocks
from June 2008 through June 2021, although
venture capital correlations have been lower.
Not only have correlations generally been high,
but beta has been even higher. AXS Thomson
Reuters Private Equity Return Tracker LDPIX,
for example, has had an equity market beta
of 1.66 over the past three years, while its venture
capital sibling has had a beta of 1.45. This
suggests that private equity and venture capital
should be thought of mainly as leveraged
equity exposure, not as portfolio diversifiers.
The other major argument for including private
equity from a portfolio perspective is that it
accounts for a significant portion of the global
opportunity set. Based on data from the
Chartered Alternative Investment Analyst
Association, private equity assets totaled about
$6.5 trillion globally as of year-end 2020 compared
with public equity assets of $67.4 trillion
and total assets (including fixed income and real
estate) of $153.3 trillion. Investors who want to
match the " market basket " portfolio would,
therefore, want to carve out about 4.2% of their
investable assets for private equity.
Hard Case to Make
The strongest argument for including private
equity in a diversified portfolio is the potential for
better long-term returns. But while higher
returns are far from guaranteed, the complexity,
risk, and steep price tags inherent in private
equity are a given. Ultimately, the fact that private
equity remains out of reach for most individual
investors is probably a good thing. K
Amy C. Arnott, CFA, is a portfolio strategist for Morningstar.
Grantham: Venture Capital Is the Last
Great Virtue of America
In February, Jeffrey Ptak, chief ratings officer
for Morningstar Research Services, and
Christine Benz, director of personal finance and
retirement planning at Morningstar, interviewed
Jeremy Grantham for an episode of The Long View
podcast. Grantham is the long-term investment
strategist for GMO, a firm he founded in
1977. He's been labeled a " perma-bear " for his
market pessimism. (The title of the episode is
" Jeremy Grantham: The U.S. Market Is in a Super
Bubble. " 1
) He's also said that capitalism is
incapable of dealing with climate change and
that we're in the " race of our lives " to save
humanity. Grantham is also a venture capitalist.
Ptak asked Grantham if his work in venture
capital has made him more optimistic about
markets and the world. Here's an excerpt from
their interview:
Jeffrey Ptak: We have one last question for you,
and it's about another form of investing that
you engage in, which is venture capital. You're a
committed venture capitalist. I think you've
spoken highly of that form of investing in the past.
My question is, can you talk about whether
the venture investments you've made has made
you more optimistic in certain ways, whether
it'd be about innovation or just what human
beings can engineer when they put their minds to
it, so to speak?
Jeremy Grantham: It has indeed made me
more optimistic. Venture capital is the last great
exceptional virtue of the U.S. I think our
capitalism is monopolistic, fat, and happy, and
not as dynamic as it used to be in general.
But venture capital, we are world beaters, the
biggest, the best, and it intersects with the
great research universities. The U.S. has pretty
much a death grip on the great research
universities, and the ones that we don't have, the
U.K. has. And that combination plus a society
that is pro-risk, willing to take risk and willing
to forgive losers to have a second try, this makes
for a formidable advantage.
But now, we have a flowering in another sense
that green VC has become a very big part,
a big subcomponent, important subcomponent.
And it is attracting an unusual type of person.
And they are, trust me, altruistic. We meet
dozens of them, and we hardly ever meet one
who actually does not care about what he
or she is doing. It is important that they have a
worthwhile job.
The thing about VC also is that in money
management you're shuffling around in the
zero-sum game. In venture capital, at its
best, you are helping increase the flow of new
ideas, you're helping to make it successful
on occasion, and it's altogether incremental as
opposed to shuffling. And I think if I were
starting again, of course, I would go into venture
capital. The ideas are exciting. The people are
more interesting. The people, through my eyes,
are better people who care about trying to
improve the world. And where the brightest and
the best used to go and write algorithms at
Goldman Sachs or before that, go and work for
McKinsey, a very substantial fraction of them now
either want to start their own company or
go into venture capital. And I completely get it,
and I encourage it. I would recommend it.
And yes, we've done extremely well in the
Grantham Foundation with our VC. It's a great
irony because it's playing off the bubble,
playing off the growth, and so on, and there's
nothing much we could do about it because
it's our mission to do that.
1 The podcast is available at: https://www.morningstar.com/podcasts/the-long-view/148.
37
https://www.morningstar.com/podcasts/the-long-view/148 https://www.morningstar.com/funds/xnas/ldpix/quote https://www.morningstar.com/podcasts/the-long-view/148 https://www.morningstar.com/funds/xnas/ldpix/quote https://www.morningstar.com/authors/2350/amy-c-arnott https://www.morningstar.com/podcasts/the-long-view
Morningstar - Q2 2022

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