Welcome to the inaugural BPO Capital LLC market outlook newsletters. BPO Capital LLC represents attractive investment options managed by institutional quality boutique managers that provide expertise in ‘risk reduction’ or an informational advantage that provides ‘alpha’ in addition to generating income that is independent of interest rate direction.
AT BPO, Our Mission is to help prepare advisors to have better conversations with clients in 2018 and beyond.
“I always got out a bit early!” is the phrase that Baron Rothschild said was the secret to his enormous wealth. And with almost every ‘traditional’ measure the current markets are pricey; it may make sense to look for as many unrelated return streams for client portfolios. It is difficult to expect this “high return, low volatility” trend to continue forever so one must be both constructive and cautious at the same time.
These are definitely interesting times. And interesting times require interesting solutions for investor portfolios. The average client account built on traditional portfolio theory enjoyed the benefit of the last thirty years which were defined by easy monetary policy, falling interest rates and less inflation. Today, a much different environment, global policy rates are near-zero, central banks have been purchasing trillions of dollars worth of global assets there is little room for continued easing and a high probability of continued U.S., as well as global tightening. This easy to comprehend, but most may not understand the broader implications on portfolio returns over the next several decades.
Today interest rates are poised to rise, equity markets are ‘pricey’ regardless of which metric we apply, volatility has re-entered the market, and inflation is beginning to appear. The big question today is: Can the client’s portfolio afford not to seek broader return streams that may provide for better portfolio outcomes?
Regardless of your expectations of market returns, we are pleased to provide the research and opinions of the premier asset managers within their area of expertise for your review. If you are interested in receiving this information on a regular basis, please visit our website and register.
THOUGHTS ON FIXED INCOME
After hitting hit a historic low of 1.4% in the summer months of 2016, the 10-year Treasury has since delivered a negative 13% return while so-called “defensive” high yielding bond proxies like Staples, Telecom, Real Estate and Utilities have been the worst –performing sectors, lagging the S&P 500 even after the positive offset from the dividend. Additionally, the U.S. Treasury pushed up against 3% – substantially higher than at any point in 2017. This action has pushed investor’s cash allocations to an 11-month high in an attempt to ‘protect’ portfolios from these wild swings…..don’t sell in May and go-away, there are strong opportunities to add returns to a client portfolio.
This mandates the need to adapt client portfolios by incorporating a different selection of choices for portfolio construction.
Volatility and corrections – sharp, painful, unexpected drops – can’t be forecast with any real precision, but after a very calm 2017 (only 8 market declines of 1% or more and nothing approaching a ‘correction’) the market has already delivered substantial swings in markets (23 market declines of >1% in just the first 13 weeks).
As we look across the equity landscape, we are seeing some trends emerge, that could foretell what investors may expect over the next few years. The S&P 500 has pretty much been the bell weather that investors have had a hard time beating over the past ten years. However, this year we are seeing a much broader set of investment categories beating the S&P 500 including the Russell and the Nasdaq indices. Both the Russell and the Nasdaq are up approximately 20% on a t-12 basis, versus the S&P 500 at approximately 12.5%. We are also seeing very similar returns come in for growth and value. Keep in mind, over the long-term value has outperformed growth, but over the past ten years, growth has led the way. Passive and directional investments have generally performed better than active managers since 2009, but we are seeing signs that this may be changing.
Investment professionals can no longer view things in isolation. After the great financial crisis, we must think differently about portfolio construction and consider incorporating more un-correlated sources of returns that offer the opportunity for better portfolio outcomes. BPO Capital provides investment professionals with access to asset managers, asset classes, investment strategies and investment structures that can potentially deliver additional sources of returns not directly tied to the broader markets that allow for market exposure without the same volatility.
At BPO, we believe investors will benefit by having normal weighting to growth and value. We also believe that small and mid-cap, and some global will keep pace if not outperform the S&P 500. This outlook also suggests that active management has the potential to add real alpha versus passive or index investing. Now is a good time to re-visit rebalancing strategies, asset allocations, sector weighting as well as the use of risk management strategies.
Wishing you great success,
BPO Capital LLC
4521 Sharon Rd, Suite 400 A, Charlotte, NC 28211