cvernon, Author at Marquette Associates

Fueling Some Relief into the New Year

Last summer, gasoline prices retreating was one of the first bright spots at the macroeconomic level. Since then, CPI has generally followed suit, correcting from a peak of 9.1% year-over-year in June to 7.1% in November. Gasoline prices are broadly a product of global supply and demand, with many economic variables at play. As a notable component of the CPI basket, it is no surprise that the price of gasoline usually moves in line with inflation, however, historically, the correlation between the two has increased during times of economic turbulence. Correlations spiked during the Global Financial Crisis in 2008, the oil price shock in 2014, and again in 2020 when COVID hit and oil futures plunged into negative territory. Correlation remained high heading into 2023, with gasoline prices turning deflationary year-over-year. Inflation is expected to continue lower from here as the Fed prioritizes price stability via higher rates. While heightened macro uncertainty remains, and other factors including weather and refinery operations can impact prices for consumers at the pump, experts generally expect overall lower gasoline prices as well, with the EIA forecasting a 12% drop in the average price per gallon in 2023 from 2022. To the extent historically higher correlations hold, the consumer should continue to benefit from some relief when refueling.

Print PDF > Fueling Some Relief into the New Year

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Adventures in Venture: Navigating the Current VC Environment

After an incredibly strong run in venture capital, public market weakness is beginning to show through in the VC space, with comparisons to the dot-com era emerging. The venture capital ecosystem, however, remains steadfast in the opportunity set due to the advancement of technology and the dry powder available. As of September 30, 2022, global venture capital fundraising activity reached $224 billion, approaching the $265 billion raised in 2021 and not far off the record $298 billion raised in 2018.¹

Technology is almost synonymous with venture capital. Through the third quarter, technology made up 85% of the U.S. deal value in 2022. In the 2000s, the technology space was less developed than it is today. Venture technology investing was mostly in hardware and telecom. Today, the focus is largely on cloud-based software. The speed at which companies across sectors are adopting technology has increased, leading to a lot of white space for innovation. Furthering momentum, COVID-19 pulled forward adoption trends, pushing companies to embrace technology in new ways. Industries like banking, agriculture, and consumer goods, which have historically been more technology-resistant, were forced to pivot in order to survive. Estimates suggest the pandemic accelerated digital adoption trends in these mega industries by 5–10 years.

The amount of dry powder in venture capital today also gives the asset class some stability. Dry powder levels are hitting all-time highs — $585 billion as of March 31, 2022 — providing a buffer to ensure there is still capital available for startups in the coming years. Ongoing investment in VC companies allows innovators to continue innovating, even in times of market stress.

While there may be some similarities with the dot-com period, there are many differences that could support a quicker recovery than the industry saw then. While we cannot predict the future, we can remain disciplined in our due diligence and look to align our clients with the VC managers that should be best positioned to navigate the volatility.

Print PDF > The Adventures in Venture: Navigating the Current VC Environment

¹Pitchbook

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Four Virtues of Private Equity

In classical philosophy we are taught that there are four virtues of mind and character. Given the uncertainty that lies ahead in 2023, it is prudent (pun intended) to revert back to these virtues — as they relate to private equity — to outline a framework that may help investors effectively navigate the market.

Prudence: The ability to discern the appropriate course of action
Temperance: The practice of discretion, restraint, and moderation
Fortitude: strength, endurance, and the ability to confront fear
Justice: fairness

Read > The Four Virtues of Private Equity

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Hike! The Herald Fed Sings

The trajectory of rate hikes by the Federal Reserve has had a meaningful impact on asset values this year. Historically, rising interest rates have aligned with higher risk-adjusted returns for real estate investors, with an average 12.8% annual total return of the NPI during past periods of Fed hikes. Although higher borrowing rates increase the cost of capital for property buyers, rate hikes typically coincide with a strong economy and easy credit. Economic strength can lead to mark-to-market rent growth opportunities and strong tenant demand within in-favor sectors, and open credit markets may allow investors to increase their purchasing power, thereby expanding the pool of real estate buyers.

This year, the Fed has raised rates to specifically target heightened inflation. During periods of price pressure and subsequently higher rates, property owners tend to increase rents in order to keep pace with growing maintenance and replacement costs. Owners and investors also benefit from supply-demand dislocations when construction, financing, and labor costs rise, placing downward pressure on new supply and ultimately increasing demand for rentals. Historically, rent growth in the U.S. has averaged 3.0% in a rising Fed policy environment, compared to 1.7% and 1.4% in steady and declining rate environments, respectively.¹ While the ultimate impact to real estate valuations from this period of higher inflation, rates, and economic uncertainty is still unknown, the asset class does benefit from its ability to effectively pass through costs, providing a hedge against macro headwinds.

Print PDF > Hike! The Herald Fed Sings

¹Federal Reserve, Hines Research 1990–2021Q4 for U.S. markets, CoStar, Property Market Analysis, Colliers

Fixed Income Indexing: A Commitment to the Bottom

The equities market has experienced a tectonic shift from active to passive investing, with passive investors benefiting from index strength and meaningful fee savings. In fixed income, however, investing in indexing strategies tends to be a commitment to the bottom. The Bloomberg Aggregate Index — the standard index for broad fixed income investing — tends to underperform most active strategies. While there may be shorter time periods where active managers trail the index, over longer time periods the index generally falls within the bottom quartile of universe performance and often in the bottom decile.

Due to the size of and inefficiencies within the fixed income market, there should be many opportunities for managers to take active risks and generate excess returns. Two common active management strategies for aggregate mandates are core and core plus, differentiated by the level of active risk and return objectives. Core strategies should be expected to outperform the index by 50–100 bps and core plus by 100–150 bps over a full market cycle. The vast majority of active managers outperform the index. In the core plus universe, the index’s rolling 5-year return was in the bottom quartile 14 of the last 20 years and in the bottom decile in 10 of those years. In the core universe, where the level of active return is lower, the index on a rolling 5-year basis was in the bottom quartile in 11 of 20 years.

To be fair, there are times when indexing pays. Many fixed income managers are “active” by systematically overweighting corporate and structured credit while underweighting Treasuries and agency mortgages to create a yield advantage. Outyielding the benchmark works well until it doesn’t. During risk-off periods of spread widening, the index tends to be one of the better performers within the universe. The two best examples of this are 2002 and 2008, when markets experienced a precipitance of spread widening due to the dot com bubble bursting and the sub-prime mortgage crisis, respectively. Those periods erased years of prior active management outperformance, though having a yield advantage remained beneficial longer-term, with those active managers outperforming in subsequent years.

While active is often the preferred method of accessing the fixed income market, an aggregate indexed strategy may be helpful as a risk management tool and indexed options may help investors take more tactical positions within fixed income sub-asset classes. Overall, investors should make sure they understand the risks and benefits of investing in active versus passive within fixed income and work with their consultant to create a portfolio that best serves their needs.

Print PDF > Fixed Income Indexing: A Commitment to the Bottom

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

An Investor’s Holiday Wish List

Hopefully not another year of coal
In the spirit of holiday fun — and an effort to put 2022 investment returns behind us — we have put together our investor wish list for 2023. We have broken the wish list into two categories: the “must-haves,” which carry the most weight and are most observable, and the “stocking stuffers,” which may not be headline grabbers but are nonetheless impactful across economies and markets. Predictably, the “must-have” items focus on a reversal of the major trends that drove the markets this year; we “must have” a better outlook across at least some of these topics. The “stocking stuffers” category is a variety of topics that either directly impact the major trends from 2022 or are more targeted with their impact on specific asset classes. And while we recognize this is not an exhaustive list, we feel strongly that if these wishes come true we can all feel better about market returns in 2023.

This year’s must-haves:

Lower inflation
Less aggressive Fed policy leads to fewer interest rate hikes in 2023
Avoid a deep recession
Resolution of geopolitical conflicts

And stocking stuffers:

Broad-based earnings in the U.S. stock market
A weaker U.S. dollar
Credit defaults start to flatline
Slowdowns in hiring and wage growth
Favorable news out of China
History repeats itself

Read > An Investor’s Holiday Wish List

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Rising Stars are a Bright Spot in 2022

While 2022 has been an exceptionally challenging year, with both equities and fixed income down meaningfully, there are a few bright spots within the high yield space. The number of rising stars, which are below investment grade securities (high yield) that have been upgraded to an investment grade rating, has already hit 2021 levels with two months remaining in the year. Fallen angel securities — previously investment grade businesses that have fallen to high yield or “junk bond” status — remain relatively low. The increase in rising stars over the last two years comes after a big increase in fallen angels in 2020, and has been driven in part by a recovery in economic activity following the pandemic and better financial discipline of management teams. Many companies used the period of incredibly low interest rates to shore up balance sheets and push out debt maturities. A company’s credit rating changing from high yield to investment grade is significant, especially when facing a slowdown, as it allows the company to better access funding in the capital markets. The number of rising stars is a good trend in credit and quality overall in high yield has improved. Paired with the most attractive yields in years, the forward outlook looks promising in credit.

Print PDF > Rising Stars are a Bright Spot in 2022

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

International Equities: Waitin’ on a Sunny Day

In recent years, international stocks have underperformed their domestic counterparts by a significant margin. Specifically, the MSCI ACWI ex-US index has compounded annual returns at just 3.3% over the last decade through the end of October, compared to an annualized return of 12.8% for the S&P 500 index. This current stretch marks the longest period of relative outperformance on a trailing 5-year basis for either index since the early 2000s.

This newsletter examines a host of factors that have contributed to this pattern of performance, including differences in composition between U.S. and international equity indices, currency movements, and geopolitics and analyzes the diversification benefits of international equity allocations within portfolios despite performance challenges.

Read > International Equities: Waitin’ on a Sunny Day

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Subscribe to Research Email Alerts

Research Email Alert Subscription

Thank You

We appreciate your interest in Marquette Associates.