In “Getting Closer to Home,” Henry H. McVey, Member & Head of Global Macro and Asset Allocation at KKR, outlines key global trends that he believes will impact asset allocations for the year.
“While the general backdrop for risk assets remains favorable, we are no longer advising folks to “Stay the Course” as we did in our January 2014 Outlook piece,” McVey writes. “Rather, given where we are in the cycle and the magnitude of gains in recent years, we have begun the inevitable process of “Getting Closer to Home” in terms of our asset allocation targets. In particular, we do advise folks to raise some cash and to tilt the invested part of the portfolio to become more opportunistic in 2015.”
In the piece, McVey also outlines key themes that make compelling “arbitrages” in the global macro landscape that CIOs and portfolio managers should pursue this year. These include:
- China’s slowing is not an aberration. As such, its role in the global economy is materially shifting, which means that McVey expects to see sizeable restructuring and recapitalization opportunities in sectors that previously over-earned and/or overstretched their footprints.
- Many corporations still have inefficient capital structures, including too much cash and too little debt, in his view. As such, investors can still benefit from corporate and/or shareholder actions to lower companies’ cost of capital and/or improve growth, including buybacks, dividends, capital expenditures and acquisitions.
- Despite a slew of liquidity in the system, many companies across both emerging and developed economies still can’t get proper access to credit. Hence, McVey still sees a compelling illiquidity premium that is worth pursuing, particularly in today’s low rate environment.
- McVey suggests harnessing volatility in the liquid commodity markets. He continues to favor private real asset investments with upfront yield, growth and long-term inflation hedging relative to traditional liquid commodity notes and swaps.
- Government deleveraging in the developed markets is disinflationary, which drives McVey’s thinking about the direction of long-term interest rates as well as the relative value of risk assets against the risk-free rates.
Henry H. McVey (New York) joined KKR in 2011 and is Head of the Global Macro and Asset Allocation team. Prior to joining KKR, Mr. McVey was a managing director, lead portfolio manager and head of global macro and asset allocation at Morgan Stanley Investment Management (MSIM). Prior to that he was a portfolio manager at Fortress Investment Group and chief U.S. investment strategist for Morgan Stanley. While at Morgan Stanley, Mr. McVey was also a member of the asset allocation committee, and the top ranked asset management and brokerage analyst by Institutional Investor for four consecutive years before becoming the firm’s strategist. He earned his B.A. from the University of Virginia and an M.B.A. from the Wharton School of the University of Pennsylvania. Mr. McVey serves as co-chair of the TEAK Fellowship board of trustees and is a member of the Pritzker Foundation and Lincoln Center Investment Committees.