This is a Good Time To Consider Alternatives
There’s lots of uncertainty in traditional asset classes these days.
Roaring inflation seems to be stubborn and persistent, with the Fed serving as a detractor rather than a facilitator. Most wonder if the looming recession will produce a quick, “V-shaped” resolution or if it will have a much longer effect.
The bigger question is: Is a traditional 60/40 portfolio still an effective tool for generating attractive total returns and protecting from downside risk?
We say times have changed for good.
The first six months of 2022 are turning out to be the worst equities performance ever recorded. At the same time, it’s the worst start for bonds in history—with bonds no longer behaving like the diversifier we have grown used to. In fact, recently, correlations have risen and bonds have – at times — been more volatile than equities.
Where’s the diversification benefit? Where’s the capital appreciation?
A Bear Market in equities is clearly here and, perhaps more importantly, expected forward returns are very low. Research Affiliates say over the next 10 years we can expect bonds to return (0.6)% with 4.5% volatility and US Large Cap Equities to return 2.0% with 15.3% volatility.
Are we at an inflection point?
Perhaps it’s time to change your perspective, acknowledge reality, add to your investment tool kit, and pivot to alternatives — correctly identified and applied, of course.
True non-correlated sources of income, that’s why. And, we’re not talking about strategies implemented with traditional asset classes in an alternative “wrapper”.
Oh, and how about leverage? Remember when it was a benefit, when it was easy to find spread opportunities with rates so low? Now it’s a millstone. Like Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.”
What’s needed now is an upside, not related to an immediate reactive function of public markets. And while we’re at it, how about something with cheap BETA plus higher allocation to alpha-generating solutions not tied to equities?
Private equity is a good example, where the focus is on the earlier stage results and fundamentals; and execution is favored over valuation.
At the end of the day, active management is essential, but it’s hard work – in general and, especially, in alternatives.
The problem is the low-rate environment–the Fed “put” has made folks a bit lazy. Remember how “old school” bond ladders made way for less labor-intensive solutions like mutual funds and ETFs? Works real well in a bull market for bonds. Not so much in a rising rate environment. Or how about just buying the index? No need to understand individual stocks.
The higher cost of the capital environment requires better decision-making and for you to be more specific and intentional about what you own.
Illiquid alternatives raise the stakes. It’s something you are going to own for the next 5-10 years and this creates an even higher hurdle.
And what about new alternative asset classes which are impossible to evaluate?
Take Crypto for instance, with the romantic idea of democratizing money, and no sovereign risk, to boot. Many conflate blockchain technology with Crypto – just one use case that’s proven the technology. But does this mean it deserves to exist in and of itself? The problem is there’s nothing fundamental to evaluate, simply a supply constraint combined with a pyramid-like scheme, totally driven by confidence and sentiment. At least sovereign currency is “backed” by the earning power of an economy. Will Crypto be regulated? We’re not even clear what that means. We do know the recent downturn has exposed weaknesses–just thing DeFi and lack of transparency. What is clear is a shake-out needs to occur (similar to cannabis).
And now ESG is becoming a part of the alternative world.
Maybe it’s time to get back to basics. Meaningful exposure to longer duration assets (i.e. Illiquid assets) in order to: take advantage of the illiquidity premium;, lower correlations with traditional asset classes; and provide non-equity upside opportunities.
Are we saying traditional asset classes are uninvestable?
The answer is a definite no!
We manage traditional asset allocation and equity portfolios as well. However, we consider all investment opportunities as part of our research process, and they need to be part of yours. It’s how we expand our horizons when it’s clear there are better alternatives than a traditional 60/40 portfolio.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.