Fidelity Adds Models with a Taste of Private Markets 

Privacy, please.

Fidelity is making a bet that’s what advisors want, at least in terms of the models they use. Last week, the company rolled out two new lines of model portfolios that incorporate alternatives, including private equity, private credit and private real estate. Both of the options use interval and tender-offer funds for the private markets exposure, though one version is built primarily with mutual funds and the other with ETFs.

Interest in private markets has jumped over the past year, though recent cracks in private credit could be dampening that momentum. Still, advisors may want simple ways to sprinkle private assets into clients’ portfolios (survey data shows nearly half are, according to the company). “These new additions to our suite of turnkey models provide advisors the tools they need to offer private markets exposure at scale,” Amanda Robinson, Fidelity’s head of wealth advisory managed solutions specialist division, said in an announcement. 

But Let’s Not Use ETFs

About a third of US investors with professionally advised assets say they prefer to have model portfolios built by advisors, per data from consumer-research firm Hearts & Wallets. And among households with at least $10 million to invest, 28% have assets in private equities.

There are only a handful of private-asset ETFs on the market, and the exposure those offer to the category are minimal, given the liquidity requirements of exchange-traded funds. Fidelity’s model portfolios don’t use funds such as State Street’s Public & Private Credit ETF (PRIV), the Baron First Principles ETF (RONB) or the ERShares Private-Public Crossover ETF (XOVR), the latter two of which include SpaceX among their primary holdings. Interval funds and tender-offer funds remain the more practical ways to get exposure to private markets.

A look at Fidelity’s new ETF model portfolios:

• There are five risk profiles ranging from conservative to aggressive. 
• The three private funds are the Cliffwater Corporate Lending Fund, StepStone Private Equity Strategies Fund and Clarion Partners Real Estate Income Fund. Allocations to the first two range from 9% to 2% and from 3% to 12%, respectively, as portfolios increase in risk levels. The allocations to the real estate fund are 3% for each, regardless of risk level.
• The models are available through Envestnet, but will be added to other platforms later this year. Fees range from 72 to 77 basis points, and the minimum investment is $100,000.

Model Behavior: Alternatives have increasingly made their way into model portfolios. T. Rowe Price and Goldman Sachs recently paired up for a line of five model portfolio options that include a mix of funds from each shop, with a high-net-worth portfolio that includes alternatives becoming available later this year. CAIS Group and iCapital have also launched model portfolios featuring alts. “That certainly shows where the market is headed,” said Pat Newcomb, relationship manager at Fuse Research Network. “We’re going to see more private-markets funds, whether they’re interval funds or tender-offer funds, being incorporated into these models.” 

A quirk of the expansion of alts in models is rebalancing, as interval and tender-offer funds have limited redemptions, he noted. Fidelity’s new models, for example, reallocate semiannually. Advisors should consider when evaluating any of the options whether the private-markets weightings are substantial enough to make a noticeable difference on returns, he said. “There are a lot of advisors that don’t have time or ability to understand the alternatives marketplace,” he said. “That’s why these companies are offering [easy] access.”