Investment Strategy

Perpetual funds offer access to private investments

Perpetual private capital funds are investment vehicles that invest continuously, often with no set maturity. They are also referred to as “evergreen”, “open-end”, or “semi-liquid” funds. Perpetual funds offer qualified investors faster capital deployment, periodic windows to add or redeem funds, and simplified tax reporting. In recent years, perpetual funds have been transforming private investing, by providing qualified investors with improved access to the unique return and diversification potential of private markets.

Historically, private capital investing has been largely limited to ultra-high net worth and institutional investors due to regulations that only permit qualified purchasers¹ to invest directly into traditional, closed-end drawdown funds. These closed-end investment vehicles generally have a fixed term of 10 years or longer, during which investors commit capital early on and thus experience cash outflows, followed by the potential for positive returns from distributions in later years. Further, high investment minimums, multi-year capital lockups, and the need to re-invest in new fund vintages also created barriers for investors.

We believe the ability to access the private markets through a fund structure with certain features may appeal to qualified investors. As such, the perpetual fund can provide a simpler way to establish and manage private market allocations. The typical features of a perpetual fund include:

• Greater accessibility: Perpetual private capital funds are available to a broader investor base, including accredited investors and qualified clients.² Additionally, many perpetual funds allow lower investment minimums, ranging from thousands to tens of thousands of dollars.
• Fast capital deployment and compounding returns: An investor buys in at the perpetual fund’s net asset value (NAV) and gains a point-in-time exposure to an often-seasoned portfolio of diversified assets, compared to traditional closed-end funds in which the committed capital is deployed over several years. The capital stays invested until redeemed, and returns compound through the investment period.
• Periodic subscriptions and redemptions allowed: Perpetual funds typically allow investors to subscribe at monthly or quarterly intervals and allow for periodic redemptions. However, perpetual funds are still intended to be long-term investments and often come with early redemption fees and restricted liquidity to avoid a fire sale of private assets in a steep market decline.
• Simplified tax reporting³: Most perpetual funds issue Form 1099, instead of the Schedule K-1 document typically generated by limited partnership drawdown funds. Schedule K-1s often arrive long after the Internal Revenue Service’s (IRS) tax reporting deadline and require more complex tax returns than Form 1099s.

According to Pitchbook, the assets of perpetual funds have more than quadrupled to over $350 billion in the past 10 years likely driven by the features above, with over 500 perpetual funds available globally as of July 31, 2024.

When used to replace a portion of a public stock and bond portfolio, perpetual funds can provide qualified investors with an efficient point of entry to the broad opportunity set available in private markets. Currently, perpetual funds are available across private equity, private debt, and private real assets (see Chart 1). Therefore, long-term investors can use perpetual funds exclusively or combine them with traditional drawdown funds to establish a diversified private capital allocation.

With more investors seeking uncorrelated sources of return to add value to their public stock/bond portfolios, we believe the ongoing growth of perpetual private market funds is a welcome evolution.

Chart 1. Perpetual funds are available across private capital asset classesSources: Pitchbook, Wells Fargo Investment Institute. As of July 31, 2024.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

¹ Qualified purchasers are generally defined as Individuals with investments of $5 million or Entities with investments of $25 million.

² Accredited investors are defined as Individuals with $200,000 Annual Income ($300,000 if Joint) for past 2 years or net worth greater than $1 million, or Entities with total assets of $5 million or greater. Qualified clients are defined as Individuals or Entities with a net worth of more than $2.2 million (excluding residence, jointly with spouse).

³ Form 1099 and Schedule K-1 are tax forms generated under the requirements of the IRS. Wells Fargo doesn’t provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Opportunity brewing?

The S&P 500 Index is now down about 4% from its recent intraday high of 6100, hit on December 6, 2024. The decline started around the release of the better-than-anticipated November payrolls report, which came out on December 6, 2024, and picked up steam around the Federal Reserve’s (Fed’s) December 18 meeting, which many characterized as a “hawkish cut.” The economic data has only improved since then, and many of the Fed’s members have taken care recently to point out that inflation could be an issue once again — given the strength of the labor market and the possibility that tariffs are likely to put upward pressure on consumer prices.

We have believed for some time that markets have been too complacent on inflation, and we are not surprised by this reckoning. We have also been in the camp that interest rates would spend much of the year higher than what we observed in broad market consensus and believe the recent rise in interest rates leaves less room for them to rise. Investors should maintain perspective and keep in mind that the uptick in inflation and interest rates is largely for the right reasons, in our view — solid economic and corporate earnings growth, which should be enough to drive the next leg higher in equity markets.

The chart suggests that the S&P 500 Index (5843) remains in an uptrend but is close to oversold territory. It should find support next at the 200-day moving average (5579). Resistance sits at the 50-day moving average (5953).

S&P Index has been trending higherSources: Bloomberg and Wells Fargo Investment Institute. Daily data from January 14, 2022, through January 14, 2025. SPX = S&P 500 Index. SMAVG (50) = 50-day simple moving average. SMAVG (200) = 200-day simple moving average. RSI = relative strength index. An index is unmanaged and not available for direct investment. Past performance does not guarantee future results.

A story of yield

Fixed-income investors have long been attracted to yield, as yield is a good proxy for cash flow. Cash flow is precisely what many individual investors are seeking to generate to cover their living expenses. Yet, beyond simple cash flow needs, the prevailing yield for high-quality fixed-income holdings has another use for investors; historically, it has been quite good at indicating total-return performance over longer periods of time. This is especially true of higher-grade, fixed-income asset classes.

Using the Bloomberg U.S. Aggregate Bond Index starting with its inception in 1976, we analyzed the total return that was experienced over a period of years, and how much of that return could be forecasted by the prevailing starting yield level. Over the past 47 years, the starting, or current yield, was a very strong indicator of future returns in the Bloomberg U.S. Aggregate Bond Index. We found the strongest correlation to the initial yield level was near the five-year average total return of this index. Other factors may contribute to an understanding of yield and return; thus, this analysis may not be indicative of future results — and multiple factors need to be considered when assessing yield and return analysis.

Bloomberg U.S. Aggregate Bond Index: 5-year total return versus initial yieldSources: Bloomberg and Wells Fargo Investment Institute. Data as of 1/13/2025. An index is unmanaged and not available for direct investment. Past performance does not guarantee future results.

Investor implications

Fixed-income investors have experienced a difficult return environment over the past several years, thanks in large part to very low starting yield levels. This analysis implies that with the recent increase in yields, fixed-income investors may experience higher returns in the future than they have experienced in the recent past. Yield tells a story, and its relevance to performance is significant.

While rising yields may better position high-quality fixed income for future positive performance, owning bonds in a portfolio should not be all about return. Fixed-income holdings can play an important role in many portfolios by providing an investor with diversification, lowering volatility, and providing liquidity.

New sanctions on Russian oil exports lift prices

On Friday, January 10, 2025, the U.S. imposed a new set of sanctions on Russia’s energy sector. This is the latest in a series of sanctions that began in 2022, after Russia invaded Ukraine (see chart). The new sanctions had an immediate effect on global oil prices, with the main crude oil benchmark prices, Brent Crude Oil and West Texas Intermediate (WTI), each up by more than 8% to start 2025 (as of January 13).

Oil prices reacted positively to the newly issued sanctions because they target significantly more ships than earlier sanctions. Many of the extra 183 ships are known as Russia’s shadow fleet. The shadow fleet, as the name indicates, are ships that operate in the shadows hiding behind a complex web of shell companies with unclear and obscured ownership. While exact export volumes for the shadow fleet are not known, it was estimated to carry more than 45% of Russia’s oil exports in 2023, and possibly even more in 2024.⁴

Outside of Russia, China and India will likely be impacted the most from the new sanctions, as both have been large purchasers of Russian oil since the Russia-Ukraine War began. Since 2023, China has accounted for 31% of Russian crude oil exports, and India 26%.⁵ While we do expect China and India to continue to purchase Russian crude oil in 2025, we also expect overall volumes to be lower than in recent years.

Looking ahead, we believe that the new sanctions will reduce Russian oil exports in the coming months, supporting oil prices at current levels. The incoming Trump administration does have the potential to alter this timeline, so we will be watching U.S.-Russia relations closely. We remain favorable on energy commodities, and our year-end 2025 oil price target ranges remain the same at $85 – $95 per barrel for WTI, and $90 – $100 per barrel for Brent Crude Oil.

Sanctioned Russian tankersSources: Bloomberg, U.S. Treasury, U.K. Treasury, European Union, and Wells Fargo Investment Institute. Data as of January 13, 2025. 68 tankers included in the chart have been sanctioned by more than one entity.

⁴ Oxford Analytica (December17, 2024). "Russia's shadow fleet will prove resilient". Oxan website.

⁵ International Energy Agency (February 9, 2024). “Average Russian oil exports by country and region”. IEA website.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, January 21, 2025.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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