After the 2008-‘09 financial crisis, we have been in a long and slow moving economic and market cycle, where immense amounts of money creation from global central banks have flown to the more liquid areas of the capital markets. This long and slow dynamic has been characterized as the “turtle cycle,” with a recovery that inches forward, pushed by consistent flows of created capital. As the Fed ends quantitative easing in October, we think the European Central Bank will start quantitative easing very soon, prolonging this “turtle cycle” for at least another two or three more years.
This “turtle cycle” fueled by extraordinary money creation has inflated financial assets, especially the most liquid and mature markets. It is difficult to detect clear value in the three traditional assets classes going forward, in particular in the fixed income space. Our Investment Committee forecasts that a moderate risk traditional portfolio will have a return of 4-5% over the next 10 years. Cash yields are negative in real terms; bonds offer limited value with record tight spreads and high valuations; and equities are approaching the “beginning of the end” of the bull market. We share Professor Siegel’s (from the Wharton School of Business) view that the market will peak at 18X versus the present 16X EPS. So where does this leave us? We are focused on finding “non-traditional” revenue producing assets which offer intrinsic value of 8-11% (i.e. real rates of 6-8%). We believe with time, liquidity will end up flowing into and appreciating the values of these non-traditional asset types, as investors recognize the opportunities. These non- traditional asset types constitute an opportunity for investors to position their portfolios for multigenerational wealth. Our Investment Committee forecasts that a moderate risk portfolio which includes non- traditional asset types will have a return of 6-7% over the next 10 years.
We’re looking at non-traditional asset types such as: revenue producing core commercial real estate; opportunistic hard money lending (against high quality assets); private debt; infrastructure and other niche asset types. Each of these briefly described below.
- Revenue Producing Core Commercial Real Estate . While we started investing in CRE in 2009 right after the crisis, our focus has shifted from Trophy Assets/ Markets to Non- Trophy Assets or Trophy Assets in Secondary Markets.
- Opportunistic Hard Money Lending. Another non-traditional asset type we like is hard money lending against high quality assets or Bridge Loans. Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing.
- Private Debt . Private debt is often utilized by small and mid-sized companies looking for capital or financing. Because of their size, these middle-market firms have limited access to liquid capital markets, which have high minimum issuance sizes. Also, these companies historically have had access to funding from banks but this changed after the 2008 financial crisis. Regulations such as Basel III were enacted, forcing banks to clean up their balance sheets and focus on core tier assets. As a result, many banks stopped lending to middle-market companies. In 2013, the majority of these loans were provided by non-banks, an opportunity for third party private debt suppliers (i.e. Shadow Banking). We see an opportunity for our clients in private debt, as the risk premium of over 5% above comparable high yield bonds compensates nicely for the illiquidity of this asset class.
- Infrastructure. Assets Infrastructure assets are loosely defined as “the facilities and structures essential for the orderly operations of an economy.” Examples of infrastructure assets include transportation networks, community facilities, and water and energy distribution systems. Investments in shale oil and gas, are examples of infrastructure assets. Typically, infrastructure assets offer non-correlated returns as the underlying assets have a different sensitivity to economic cycles than typical financial assets have. They also benefit from growing demand for essential services provided, and monopoly-like characteristics of high barriers to entry in their markets. Infrastructure investment shares some of the characteristics of fixed income (long-term steady income stream), real estate (physical assets) and private equity.
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