In his widely anticipated annual letter to investors, Larry Fink, the chairman and chief executive of asset management giant BlackRock, proposed a significant shift away from the traditional investment portfolio allocation that has guided investors for decades. Rather than adhering to the conventional 60/40 split between stocks and bonds, Fink suggested a new formula: 50% stocks, 30% bonds, and 20% private assets.
This recommendation represents a notable departure from mainstream investment advice and warrants careful examination, especially given BlackRock’s influential position in the global investment landscape. As the world’s largest asset manager, the firm’s strategic moves and recommendations often signal broader industry trends.
Understanding Private Assets
Before evaluating Fink’s advice, it’s important to clarify what private assets actually encompass. Sometimes referred to as alternative assets, private assets differ fundamentally from publicly traded securities such as stocks and bonds. This category includes private equity, hedge funds, private credit, and real estate—essentially any investments that don’t trade on public exchanges.
Historically, these investment vehicles have been primarily available to institutional and high-net-worth investors, largely due to high minimum investment requirements, complex structures, and regulatory restrictions designed to protect retail investors. This exclusivity has created both mystique and genuine barriers to entry for average investors.
The Research Behind the Recommendation
Interestingly, Fink’s portfolio advice coincided with the release of a new study circulated by the National Bureau of Economic Research (NBER) examining private-equity investment returns. The study’s findings add a layer of complexity to BlackRock’s recommendation.
The NBER research uncovered an inverse relationship between private-equity fund size and performance. The authors were notably direct in their conclusion: “Larger funds do larger deals, which perform worse.” This finding highlights a fundamental challenge for investors attempting to implement Fink’s advice in their own portfolios.
The dilemma is straightforward but difficult to resolve: private asset funds with impressive long-term track records typically grow so large that their subsequent performance often becomes mediocre at best. This growth-performance paradox creates a significant hurdle for investors seeking exposure to this asset class.
The Alternative to Large Funds
If large private asset funds face performance challenges, the logical alternative would be to invest in smaller, younger funds. However, this approach introduces its own set of complications. By definition, newer and smaller funds have shorter track records, making performance evaluation more difficult.
Even for investors willing to conduct thorough due diligence on these relatively unknown funds, there’s no reliable methodology to determine which will be among the few that generate outstanding returns. This uncertainty represents a substantial risk factor that must be weighed against the potential diversification benefits.
BlackRock’s Private Asset Performance
To evaluate the practical implications of Fink’s advice, it’s instructive to examine BlackRock’s own track record with private asset investments. The firm’s iShares Listed Private Equity UCITS, available to European investors, produced a 10-year U.S.-dollar-denominated return of 12.0% annualized through the end of 2024. While impressive in absolute terms, this return lagged behind the S&P 500’s total return of 13.1% over the same period.
Similarly, the BlackRock Private Investments Fund, which is available in the U.S. exclusively to institutional investors, underperformed the broader market. With a shorter history than the European UCITS fund, it generated a 6.8% annualized return over the three years through 2024, compared to 8.9% for the S&P 500 during the same timeframe.
These performance figures raise important questions about the value proposition of private assets in a diversified portfolio. While underperforming the S&P 500 isn’t necessarily disqualifying, it does warrant careful consideration of the risk-adjusted benefits.
Correlation and Volatility Considerations
One potential justification for including lower-returning assets in a portfolio is their diversification benefit. If private equity investments have low correlation with traditional equity markets, for instance, their inclusion could still improve a portfolio’s risk-adjusted returns despite generating lower absolute performance.
However, the data suggests this diversification benefit may be more theoretical than practical in BlackRock’s case. The correlation coefficient between the S&P 500 and BlackRock’s European UCITS fund over the last decade is remarkably high at 96%—almost a one-to-one relationship. This high correlation indicates that the fund largely moves in tandem with the broader U.S. equity market.
Even more concerning from a risk perspective is that over the past decade, the fund has been 52% more volatile than the S&P 500. This combination of higher volatility and high correlation with traditional equities undermines one of the primary arguments for including private assets in a portfolio.
The Business Incentives at Play
Beyond portfolio optimization, there may be additional business motivations behind BlackRock’s push into private assets. A 2023 study published in the Review of Financial Studies titled “Competition for Attention in the ETF Space” provides some relevant insights. This research was conducted by a team of respected academics: Itzhak Ben-David of The Ohio State University, Byungwook Kim of the University of California Irvine, Francesco Franzoni of the University of Lugano in Switzerland, and Rabih Moussawi of Villanova.
In an email communication referenced in the article, Ben-David argued that the cyclical nature of investor sentiment plays a crucial role in understanding when investment firms like BlackRock launch more narrowly focused and expensive products.
According to Ben-David, during the upward phase of the sentiment cycle, investor optimism builds on positive news and extrapolates recent performance into the indefinite future, eventually reaching a point of peak enthusiasm. This peak often coincides with the timing of specialized ETF launches by providers—just before the sentiment cycle begins its downward trajectory.
This pattern aligns with the heightened recent interest in private assets. Over the past 15 years, the trend of increasing allocation to private assets has moved steadily upward, with a noticeable acceleration in recent years. By emphasizing private markets now, BlackRock may actually be responding to existing investor demand rather than leading a new investment paradigm.
Fee Considerations
An important aspect not to be overlooked is the fee structure of private asset investments. These vehicles typically charge significantly higher fees than traditional stock and bond funds or ETFs. While standard index ETFs might charge expense ratios of 0.03% to 0.10%, private equity and other alternative investments often command management fees of 1.5% to 2.5%, plus performance fees that can reach 20% of profits.
For asset managers like BlackRock, the business case for expanding into private assets is compelling. As competition has driven fees for traditional investment products to historic lows, the higher fee structure of private asset vehicles offers an attractive revenue opportunity. A shift of just 20% of a portfolio from traditional to alternative assets—as Fink suggests—could substantially increase the fee revenue generated from that portfolio.
The Democratization Challenge
BlackRock’s move to make private assets more accessible to individual investors faces a fundamental challenge highlighted by the NBER research. As the firm attracts more capital to its various private investment vehicles, it will inevitably need to focus on larger deals to deploy that capital efficiently.
Yet if the research is correct that “larger funds do larger deals, which perform worse,” this growth could undermine the very performance that makes these assets attractive in the first place. This creates a paradoxical situation where the democratization of private assets might simultaneously diminish their potential benefits.
A Balanced Perspective
While skepticism regarding BlackRock’s motivations is warranted, it’s important to acknowledge that some exposure to private assets could potentially benefit certain investors, particularly those with longer time horizons and higher risk tolerance. The illiquidity premium—the additional return investors might receive for accepting limited ability to sell their investments—can be a valuable source of returns for those who don’t require immediate access to their capital.
Additionally, truly sophisticated investors with access to top-tier private equity funds might still achieve returns that justify the higher fees and reduced liquidity. However, as the NBER study suggests, identifying these outperforming funds in advance remains exceedingly difficult.
Conclusion
Larry Fink’s recommendation to allocate 20% of investment portfolios to private assets represents a significant departure from conventional wisdom. While diversification beyond traditional stocks and bonds may offer theoretical benefits, the practical implementation of this advice faces substantial challenges related to performance, correlation, volatility, and fees.
The coincidental timing with the NBER study highlighting the inverse relationship between fund size and performance adds an important cautionary note. As BlackRock and other major asset managers work to democratize access to private assets, investors should carefully consider whether these investments truly offer diversification benefits that justify their higher fees and complexity.
Rather than following Fink’s specific allocation recommendation, investors might be better served by first evaluating their personal financial circumstances, time horizons, and risk tolerance. For many, the traditional 60/40 portfolio—or perhaps a modified version with a small allocation to carefully selected alternative investments—may still provide the optimal balance between growth potential and risk management.
Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version.
