Kamal Bhatia, president and CEO of Principal Asset Management, argues that investors should instead care about how different exposures interact with each other, in particular in times of stress
I often hear the same question from institutional investors: how much should we allocate to public markets and how much to private markets? It is a reasonable question, but one that is increasingly appearing outdated.
The risk is that investors spend too much time debating the size of each sleeve in their portfolio and not enough time asking whether those sleeves are sufficiently different. A portfolio can look well diversified on paper and still prove fragile during periods of stress, especially as the lines between public and private markets continue to dissolve since all investors fish in the same pond – all at the same time.
For European investors in particular, stubborn inflation, acute energy dependence, geopolitical confusion and pension stress are all testing portfolios in different ways. Indeed, European investors with a stronger domestic bias will feel regional risks more directly. For a portfolio to navigate these challenges and reach its ultimate goal, it will therefore need to be nimbler than in the past.
To deliver in this very challenging market environment, investors need to move beyond betting which asset class offers the best returns, towards understanding how portfolios are constructed to deliver, and shift between particular outcomes. This might include supporting income, liquidity, flexibility and long-term reliability as risks accelerate across markets and older allocation models struggle to keep up.
I often compare this to a rowing team. The boat does not go the fastest because every rower pulls as hard as possible on their own. The team wins when everyone is coordinated. Portfolios are not so different. Public equities, fixed income, private credit, real estate and infrastructure each have a role to play, but the value lies in how they work together.
Private markets play an important role, but they are not a shortcut to better outcomes. The real question is not whether European investors should add more or fewer private assets, but whether they have the appetite and discipline to use them effectively, especially at scale, without forcing disruptive shifts or allowing artificial expectations.
“The concern is that the pieces of a portfolio succeed on their own but fail together when they are needed most”
Private credit, real estate and infrastructure help provide income, inflation sensitivity and diversification that many investors need. But those benefits come with real trade-offs: returns of capital, less liquidity, more complex valuations, restructuring dynamics and the need to pace commitments carefully. Private markets should not be treated as a simple substitute for yield that has become harder to find elsewhere.
The concern is not that one asset class disappoints, but that the pieces of a portfolio succeed on their own but fail together when they are needed most, which is what I’d define as “interaction risk”.
Interaction risk often becomes most visible when public markets are under pressure and private commitments are least flexible; when teams rely on different liquidity assumptions; when private valuations lag public market signals; or when governance processes move too slowly to rebalance the portfolio when it matters.
Without a clear view across the whole portfolio, perceived diversification can obscure how risks might react under stress. Public equities, fixed income, private credit, real estate and infrastructure need to fulfil their own roles in delivering alpha but still function when liquidity tightens, income needs rise, valuations move and risk must be managed quickly.
This is where a total portfolio approach helps investors ask the right questions. Do we have real liquidity? Are private commitments paced appropriately? Are income sources truly complementary, or are they more concentrated than they appear? Are valuation, governance and risk systems connected? Critically, can the portfolio adapt without losing sight of its long-term purpose?
Europe’s pension systems already know this challenge well. Long-dated liabilities demand discipline. Cashflows matter, so does downside control and the ability to make decisions across the whole portfolio when, for example, certain sovereign bond markets suddenly go into freefall. A total portfolio mindset aligns naturally with these realities, but only if integration is treated as a core investment discipline rather than an operational afterthought.
The next phase for European investors will not be defined by moving more capital from public to private markets or by the highest conviction on any single asset class. It will be defined by the ability to bring public and private exposures together in a way that manages liquidity, supports income, manages risk – and keeps the portfolio aligned with its long-term purpose. In a more uncertain market environment, interactions may be the difference between a portfolio that looks diversified and one that is truly built to endure.
Kamal Bhatia is president and CEO of Principal Asset Management
