Part 3: Building Portfolios for Mean Reversion

At a Glance

• Mean reversion affects all asset classes, but not at the same time or to the same degree.
• Asset allocation plays a central role in shaping long-term outcomes and volatility.
• Large institutions allocate meaningfully to private assets to reduce reliance on public markets.
• Private markets offer access to a broader share of the global economy.
• A disciplined, diversified approach is designed to compound wealth across full market cycles.

In Parts 1 and 2, we explored what mean reversion is and how it has shown up historically across public and private markets. The remaining question is how portfolios can be constructed with this reality in mind.

Strategic asset allocation is not about predicting which asset class will perform best next. It is about building a structure that is resilient to changing market leadership, valuation extremes, and periods of heightened volatility. This section outlines how long-term allocation decisions, particularly the inclusion of private assets, have shaped outcomes for large institutions and how those principles inform our Core approach.

Strategic Asset Allocation

If we look at historical returns across asset classes over more than 100 years, several patterns emerge.

• The total return from global public equities, including dividends, has generally ranged from about 8.5% to 10% per year, with U.S. markets at the higher end of that range and Canada just under 9%.
• The return from government bonds has averaged 4.5% to 5% over the last century. Higher returns can be earned by moving up the risk ladder for lending with commercial loans, mortgages and private credit but only the latter has exhibited stock-like returns over decades
• According to an extensive NBER study published in 2017, income-producing real estate has matched total stock market returns with lower volatility. The study examined 145 years of data across 16 countries.

Estimates from major consulting firms suggest that global financial assets total between $450 trillion and $600 trillion USD. These figures exclude personal residential housing, which alone is estimated to be worth more than $250 trillion USD as of 2025. Approximately 55% of global investable assets are allocated to public equity and bond markets. That implies that other asset classes such as commercial real estate, private companies, infrastructure, private debt, and commodities represent nearly $250 trillion USD.

Outside of personal homes and recreational properties, most individuals hold most of their investments in publicly traded stocks and bonds. Private asset markets are often difficult to access for several reasons.

• First, private investments typically require significantly larger capital commitments than those needed to invest in stocks or bonds directly, or through mutual funds and ETFs.
• Second, while mutual funds and ETFs may hold dozens or even hundreds of securities, private equity and private credit funds often invest in only 10 to 15 positions. Achieving proper diversification requires commitments to multiple funds.
• Third, liquidity is limited. Closed-end structures, which are common in private equity and private credit, can lock up capital for 10 to 15 years before all funds are returned to investors.
• Real estate exposure can be obtained through publicly traded REITs, but returns have historically lagged private real estate investment pools and significantly higher volatility. This can be seen by comparing our Canadian and U.S. private real estate pools with publicly available REIT indices, as discussed earlier.
• Finally, investors in private real estate funds cannot easily sell their interests to other investors. Liquidity is typically requested by tendering units back to the fund itself. To meet redemptions, a fund may need to sell assets, bring in new investors, or rely on credit facilities. This process can take several months, and in periods of stress, potentially years if many investors are seeking liquidity at the same time.

Why Private Assets at All?

Given the issues and limitations noted above, why would an investor include private assets in their portfolio?

Here is why:

1. Liquidity needs are often limited.

Large investors such as major pension plans, endowments, and sovereign wealth funds do not have significant liquidity needs that require their portfolios to be convertible to cash within days. The same is often true for individual investors, yet many still pay a premium for liquidity they rarely, if ever, need.

2. Private assets represent a large portion of investable assets.

Private assets account for close to 50% of the world’s investable assets. Including them in a portfolio creates diversification and reduces volatility. A useful comparison is the Canada Pension Plan, with assets of approximately $777 billion CAD as of late 2025, and Norway’s $2 trillion USD sovereign wealth fund, managed by Norges Bank Investment Management.

Over the ten years to September 2025, Norway’s fund returned 6.7% per year, compared with 8.8% for the Canada Pension Plan. Norway’s portfolio is roughly 70% invested in public equities and almost 30% in bonds, with less than 2% allocated to private assets. By contrast, the Canada Pension Plan held approximately 29% in public equities, 15% in bonds, and 56% in private equity, credit, infrastructure, and real estate. The result, even after a strong recent bull market for public stocks, has been a return advantage of roughly 2% per year with lower volatility.

3. Investment managers can be more actively involved.

Managers of private capital are able to play a more active role in how underlying assets perform. In private companies, this may include board participation or helping to recruit and develop senior management. In real estate, long-term results are driven by leasing decisions, financing structures, and value-added development. In most cases, manager compensation is directly tied to achieving specific return targets for passive investors.

4. Endowments and pension plans allocate meaningfully to private assets.

Harvard University’s endowment totaled approximately $57 billion USD and, as of 2025, had earned a ten-year average return of 9.6%. Its asset allocation includes nearly 40% in private equity and 30% in hedge funds, with only 14% in public equities and 5% in bonds

Family offices are used by many ultra-high-net-worth families. The range of assets they manage can vary from approximately $200 million to many billions of dollars. In a recent review of U.S. family office asset allocations, the following results emerged.

U.S. Family Office Asset Allocation (2025)

Source: UBS Global Family Office Report 2025, showing U.S. family office average allocations to traditional (46%) and alternative (54%) asset classes.

Institutions and ultra-high-net-worth investors typically have both the capital and the patience required to invest in private assets. Over time, that has made a meaningful difference in the superior risk-adjusted returns they have achieved.

We have established that family offices with one billion dollars, endowments with tens of billions, and pension plans with hundreds of billions to invest are able to access the private capital opportunities they want.

The question then becomes how high-net-worth and ultra-high-net-worth investors, with far less capital, can participate in these markets in a sensible way. That is a question we have been asking ourselves as a firm for more than 25 years.

What are the attributes we need to see in private capital investment pools designed for our clients?

Answering that question properly requires a disciplined process. It begins with Stephen Covey’s Habit No. 2, “Begin with the end in mind.” From there, we objectively assess the current reality, much like the discussion above on private capital markets, and then build a plan to move from that reality toward the outcome we are trying to achieve.

The next step is to define the asset classes in which we want to provide access.

Private Fixed Income

This category includes real estate lending, which typically starts with first mortgages on residential or income-producing properties. These low-risk mortgages generally deliver yields comparable to, or slightly higher than, corporate bonds, with less default risk. Liquidity in these strategies is relatively high, as borrowers make regular monthly payments of principal and interest.

As risk tolerance increases, investors can move into second mortgages, land loans, or development financing. While yields can increase meaningfully in these areas, risk rises sharply and liquidity often declines, particularly during periods of market stress.

For investors seeking higher yields without taking on the elevated risk and reduced liquidity associated with development lending, private credit can be an attractive option within private fixed income.

The chart below, from Ares, a global asset manager with approximately $600 billion in assets under management, shows 20-year returns through mid-2024 across several asset classes. Notably, private credit returns are comparable to those of global developed public equities, but with roughly one-third of the risk. Public markets tend to be far more volatile, while private credit has historically offered a more stable return profile.

Private Markets Have Historically Offered Investors Better Risk-Adjusted Returns

Public vs. Private Risk and Return

Private Equity

Ares makes a compelling case for U.S. private equity markets using the data below, which shows the percentage of companies that remain private across both large-cap and middle-market segments. This trend has been reinforced by a sharp decline in the number of publicly traded companies in the U.S. since 1997.

Number and Market Cap of US Listed Companies 1980 - June 2024

Source: Bloomberg. Stock count from NASDAQ, New York Stock Exchange (NYSE), and New York Stock Exchange American.

The U.S. Economy (and Alpha) Is Increasingly Accessed Through The Private Markets

A similar pattern can be seen in Canada. A December 2025 report from the Fraser Institute highlights that the number of publicly traded companies has fallen to 2,114 from 3,520 since 2008. The report attributes much of this decline to a challenging economic environment. While that may be a contributing factor, there is likely a broader explanation.

Being a public company has become increasingly complex and expensive. Reporting, regulatory, and compliance requirements create strong incentives for many businesses to remain private. In Canada, there are more than 1.1 million private employers, and that number continues to grow each year, according to Statistics Canada data from 2023.

At the same time, private equity and private debt markets now have access to substantial pools of capital. As a result, private companies no longer need to go public in order to achieve liquidity, fund growth, or create viable exit strategies for owners.

In both Canada and the United States, private companies account for a significant share of GDP. Investors who do not have some exposure to private capital markets are therefore missing participation in a large and growing portion of the overall economy.

Real Estate

A recent article from CRE Daily noted that the estimated value of global real estate is approaching $400 trillion USD.

Commercial real estate represents roughly $60 trillion of that total, while residential real estate accounts for close to 75%, or approximately $287 trillion USD. Much of the residential category, however, includes multi-family rental assets, which can be an attractive and relatively conservative investment. If we remove personal-use housing as an investable asset, the residual market would be similar in value to that of all public equity markets combined, estimated at $126 trillion USD. Other types of real estate investment options include farmland, timber, and infrastructure.

As of 2025, the eight largest Canadian pension plans, commonly referred to as the Maple 8, managed approximately $2.4 trillion CAD in assets. About 20% of those assets, or roughly $500 billion CAD, are invested in real estate and infrastructure.

Real estate has several attractive features for pension plans that must meet long-term retirement income obligations for millions of Canadians. Much of the return from both real estate and infrastructure is in the form of rental income. This income tends to rise over time in line with inflation and has low volatility.

Core: Putting It All Together

The image below outlines our process for combining strategic and tactical asset allocation, reflecting Aristotle’s observation that the whole is greater than the sum of its parts.

Since January 2000, we have tracked our results on a cumulative basis for our clients, net of all fees, and compared them with external benchmarks.

For most of the past 26 years, our Core Composite model has outperformed the indices referenced above. More recently, both the S&P 500 (in Canadian dollars) and the S&P/TSX have moved ahead as a result of a strong bull market in equities.

We believe that when mean reversion reasserts itself, the Core Composite will outperform and do so with significantly less volatility. Our primary objectives for clients are as follows:

1. Earn an inflation-adjusted annual return of 4%. Inflation has averaged 2.14% from January 2000 through December 2025, which translates into a nominal return target of approximately 4.74% per year.
2. We aim for roughly 50% of total returns to come from income in the form of rents, dividends, and interest. Currently, the yield of our Core Composite is just over 4%. This dramatically reduces the volatility of the portfolio.

Summary

This Mean Reversion 3-part series focused on two key principles that influence investor returns.

The first is the likelihood of mean reversion when asset classes experience returns that are meaningfully above or below their long-term averages. As of January 2026, most global public equity markets were at or near record highs and record valuations.

The opposite is true for other asset classes, such as real estate and infrastructure. Our view is that both will experience mean reversion, but in opposite directions.

The second principle is that strategic asset allocation is critical to building wealth and achieving consistent long-term returns. The world’s largest institutions and ultra-high-net-worth families have made this approach a cornerstone of their investment platforms.

For individual investors to replicate this model, they require access to open-ended and evergreen investment options in private capital markets. This is what our pools have been able to provide for our clients.

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