Chart of the Week: The role of semiliquid funds in your portfolio

This week’s chart comes from the Morningstar Manager Research team’s report The Role of Semiliquid Funds in Portfolios.

The full report breaks down how these vehicles fit into modern portfolios as private markets go mainstream. I’ll be exploring some of the key points.

Rationalising the allure

The prospect of maximising returns is the key allure of private investments. For investors seeking higher long-term returns, semiliquid strategies can provide access to private equity or venture capital-style opportunities with potentially higher returns compared with public markets.

Similarly, enhanced income needs can be met by semiliquid strategies in private credit, infrastructure debt, or real estate income funds.

Other objectives like capital preservation or inflation protection can also play a role. Real assets such as infrastructure and real estate can provide stability and a natural hedge against inflation through Consumer Price Index-linked revenues or rent escalations.

Diversification benefits arguably overstated at face value

Semiliquid funds often share similar risk exposures with traditional assets, which can create multiple issues.

A private equity fund, for example, is more likely to expand the equity opportunity set by accessing companies that are simply not available in public markets, rather than offering exposure to a distinct set of risk factors like a market-neutral or a merger arbitrage strategy would.

Indeed, private equity returns tend to correlate with public equity market returns, especially at the extremes (see Exhibit 1 below), but the lack of real-time market pricing for underlying assets should not be confused with low correlation; in other words, the diversification benefits are hard to quantify and arguably overstated at face value.

As a result, private equity and venture capital are best considered as part of a portfolio’s equity allocation, consistent with a total portfolio approach.

Likewise, direct lending offers similar credit risk exposures as traditional corporate bonds and fits best within a broader fixed-income allocation. By contrast, investors seeking structural diversification should seek to introduce new, uncorrelated risk factors to complement traditional exposures.

The Three P’s

A semiliquid fund may align with an end-investor’s objectives and needs; however, additional factors should be carefully considered. Not everyone is equipped to invest in illiquid assets. Successful investing in private assets depends on meeting three key preconditions, or “P’s”.

• Patience: A long-term investment horizon is the name of the game in private assets. Transactions are less frequent than in public markets, making liquidity unreliable. Investors should only consider semiliquid funds if they have a long investment horizon of at least seven to 10 years.
• Premium: Investors should demand an incremental return for giving up liquidity and dealing with the complexities and intricacies of private assets investing - Otherwise, what’s the point? Without superior returns, semiliquid funds are not worth the additional hassle. Requiring additional compensation for the risks borne makes sense in theory, and the literature on the so-called illiquidity premium is vast. Historical data suggests a premium does in fact exist, but skeptics point out that this is at least in part explained by the typical characteristics of the market.
• Proficiency: There is no such thing as low-cost, passive exposure to private markets. Unlike traditional markets, there is no standardised benchmark or “beta” strategy to lean on, thus making fund selection a decisive and inescapable factor for success. Private assets are notoriously expensive to access, and there is a wide dispersion of returns across strategies, especially in private equity, reflecting both the potential payoffs and the penalties of manager selection.

Four key steps to drive portfolio construction

• Setting expectations on risk and returns: this means acknowledging that private assets aren’t magically less volatile; rather, pricing lags smooth the data.
• Ensuring alignment across fund structure: structure matters as much as the strategy itself. Match the fund structure to the underlying assets and to investors’ needs.
• Sizing the footprint: illiquidity, rebalancing limits, and steep fees all shape how much private exposure a portfolio can handle.
• Build the whole portfolio, not silos: different frameworks and optimisation algorithms should inform rather than dictate allocations

Whether you’re deciding if semiliquid funds are for you or seeking a clearer allocation framework, the report delivers the key insights investors need to make informed decisions.

You can access the full report for free here.

Previous editions of Chart of the Week.

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To support investors in this task, Morningstar introduced the Medalist Rating for semiliquid funds in 2025. Our research approach focuses on the three pillars of qualitative analysis that we believe are key drivers of funds’ success: People, Process, and Parent. The rating seeks to identify the strategies expected to outperform relevant benchmarks and peers, and flag those likely to underperform, as well as help investors understand the suitability of strategies for an intended purpose. Our team has expanded our existing methodology to suit these more complex and less transparent investment options.