Category: Chart of the Week

The More the Merrier?

A driving force for most investors seeking to add a private equity allocation to their portfolios is the strong performance that the asset class has consistently generated over time. Since 2009, the total number of global private equity investors has more than tripled, growing to nearly 10,000 global investors at the end of 2020.  The asset class has historically experienced a 5%-15% increase in the number of new investors on an annual basis, however the growth of new private equity investors has been 10%-15% in recent years. We believe these growth figures will remain elevated due to continued strong demand, which is largely driven by return targets, strong equity markets, and portfolios that have become larger and better able to accept illiquid private market allocations.

As more investors enter into the private equity space, it will likely become more difficult to access top performing managers due to fund size capacity constraints and the deeply established relationships that formed between early investors and these managers as they grew their platforms. Investors who are unable to gain exposure to the funds of established managers will need to seek out emerging managers for allocations.  While these emerging managers have historically provided a higher median return due to strong incentive alignments and smaller fund sizes, they have come with a much wider range of performance outcomes.  New and existing investors are likely to require guidance as difficult choices will need to be made when it comes to either constructing a new private equity program or refining an established program. To that point, difficult selections must be made as many managers are both returning to the market more quickly than they have in the past and raising larger funds with capital deployment outside their historical focus.

All of this being said, investors should not be deterred from exploring the value of an allocation to the private equity space given the benefits the asset class provides, including diversification and the potential for strong absolute returns. While the private equity investor universe is mostly comprised of larger, institutional investors like pension plans, endowments, and foundations, high-net-worth individuals and families have increasingly made allocations to private equity investments in recent years. We would encourage clients with sizeable asset levels, the ability to build diversified programs, and appropriate tolerances for the illiquidity associated with these types of investments to consider adding an allocation to private equity within their portfolios in a prudent and thoughtful manner.

Print PDF > The More the Merrier

 

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.

Can Equities Provide a Hedge Against Inflation?

Inflation has been at the forefront of the minds of many investors in recent months as higher price levels have resulted from economic reopenings and supply chain dislocations across the globe. For instance, the consumer price index — which measures the cost of a basket of goods purchased for consumption by urban households in the United States — rose 0.4% during the month of September, coming in slightly above expectations and translating to a 5.4% jump on a year-over-year basis. Notably, the yearly spike in the CPI is the most significant in over a decade. While the debate on whether current inflation levels are transitory in nature or pose a longer-term threat to the economic health of the world is of great importance and will clearly continue for some time, the question of how investors can mitigate risks stemming from price level increases through the use of different asset classes is also worth exploring.

Real assets, including commodities and real estate, are known to be robust inflation hedges due to the fact that input costs, along with property values and rental income streams, tend to rise in tandem with overall price levels. The case for equities as a guard against higher inflation can be argued by pointing out that revenues and earnings of companies with inelastic demand for their goods and services may also rise along with inflation, due to the fact that firms with strong customer bases are able to pass on price increases to end consumers with relative ease. Generally speaking, this argument has held true in recent decades, as U.S. equity indices have tended to appreciate during inflationary periods going back to the late 1970s. Specifically, and as displayed in this week’s chart, equities have demonstrated hedge-like performance characteristics during periods of moderate inflation (CPI increases of 1–10%) and have largely generated positive real returns during those time frames. It is important to note that recent performance trends are likely aberrational, as equity indices have bounced back quite strongly after pandemic-induced troughs that occurred around the same time as the beginning of the current inflationary period. During times of significant inflation (CPI increases of 10% and above), equity performance has been more mixed, with returns of various style indices usually positive (though often coming in below the prevailing inflation rate). Regardless of whether or not the current inflationary regime is transient or long-term in nature, the data clearly indicate that equities can play a role in helping to lessen the impact of price level increases on the purchasing power of investment portfolios. Prudence and diversification across the asset class spectrum can also help investors endure elevated inflation levels that may persist into the near future.

Print PDF > Can Equities Provide a Hedge Against Inflation?

 

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.

Back So Soon?

Over the past decade, U.S. private equity firms have returned to market sooner and sooner. The fundraising environment for these organizations remains attractive due in large part to strong performance and the persistent gap between private and public market valuations. Furthermore, the current robust dealmaking climate, both in terms of platform investments being made and potential add-on activity throughout the period during which portfolio companies are held, means that managers are both investing their funds more quickly and holding additional capital in reserve. These factors have resulted in more frequent fundraises.

This dynamic of accelerated capital deployment introduces incremental risks for private equity investors, including increased vintage year risk with the potential for greater return dispersion throughout an economic cycle. Moreover, more frequent fundraising could put stress on a private equity firm’s team, both with respect to the investment professionals leading deals and the operational resources executing value creation plans. Finally, more frequent fundraising, if not accompanied by shorter hold periods, will require private equity firms to return to the market more regularly with less realized performance, as potential gains stemming from recently deployed capital will be largely unrealized.

The trend of private equity firms deploying capital more quickly and returning to market sooner puts pressure on limited partners to continuously think strategically about portfolio construction. Thoughtful, consistent investment pacing that is supported by a robust go-forward pipeline of compelling fund opportunities will help to mitigate many of the aforementioned risks. Additionally, a deliberate approach will allow limited partners to prioritize opportunities in which they have the most conviction, gain access to those funds, and capture the outsized return potential of private equity investments.

Print PDF > Back So Soon?

 

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 Impact of the Delta Variant on the U.S. Economic Reopening

Thanks to a rollout of effective vaccines at the beginning of 2021, daily new cases of COVID-19 in the United States steadily declined from roughly 250,000 in January to 12,000 in July. That said, daily new infections then quickly reverted to over 80,000 in about one month. This uptick was mostly due to the outbreak of the Delta variant, a more contagious form of SARS-CoV-2 which now accounts for nearly all new cases in the U.S. With the nation now better prepared to combat the strain using both vaccinations and regulations including mask mandates, new daily cases of the Delta variant have since declined to around 54,000 in recent days. This week’s chart assesses the impact of the Delta variant on the domestic economic reopening by examining travel and dining trends using datasets from OpenTable — an online/mobile restaurant reservation service — and the Transportation Security Administration. To measure the scale of the economic slowdown caused by the coronavirus pandemic, the chart shows the percentage change in the number of restaurant diners and air travelers compared to pre-pandemic levels in 2019 (e.g., 10/10/21 vs. 10/10/19). Seated diners are individuals who dined at a sample of restaurants in the United States using OpenTable via online reservations, phone reservations, and walk-ins. Air travelers are those individuals who were screened by TSA agents at security checkpoints within airports in the U.S.

As can be inferred from the chart, both datasets clearly indicate a complete economic shutdown in March of 2020 following the onset of the pandemic. This was followed by an economic reopening several months later, represented by consistent upward trends in both data series leading up to June of 2021. When the Delta variant started circulating in July, seated diners and air travelers decreased by 20% and 30% in the following periods, respectively (compared to 2019 levels), marking a shift in the trends that had been exhibited in previous months. That said, both series picked back up shortly thereafter, reaching -4.8% and -18.4% in October, respectively (again, when compared to levels recorded in 2019), as daily new cases of the Delta variant have subsided. All of this is to say that the impact of the Delta variant on the U.S. economy pales in comparison to that of the original COVID-19 outbreak, as individuals and businesses alike seem better equipped to balance protection against the virus with economic activity. If daily new cases of the Delta variant continue to decline and the vaccination rate in the United States improves, the data indicate that a full economic reopening could take place in the foreseeable future.

Print PDF > The Impact of the Delta Variant on the U.S. Economic Reopening

 

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.

Commodities: The Full Story

The first three quarters of 2021 have seen positive performance from a variety of asset classes ranging from U.S. and international equities to bank loans, which have exhibited returns close to their 10-year averages. However, one segment of the market that has experienced strong, aberrational performance on a year-to-date basis is commodities. Through the end of September, the S&P GSCI, a broad-based index that includes futures contracts on physical commodities, has returned 38.3% since the beginning of the year, far in excess of its long-term average. Recent performance for the asset class has largely been driven by surging demand for raw materials amid economic reopenings, coupled with pandemic-fueled supply chain dislocations, which caused the prices of many commodities to skyrocket. For instance, both lumber and copper experienced all-time highs during the first half of 2021, while agricultural commodity prices reached a 7-year peak earlier in the year as a result of strong demand for meat. Oil consumption also hit a seasonally adjusted high in July of 2021, which led to a 50% increase in the price of crude futures from the year prior. As the global economy continues to reopen, labor shortages, supply chain bottlenecks, and strong demand for raw materials will likely persist, meaning that positive performance from commodities may continue into 2022.

As investors assess the prospects of the commodities space going forward, it is important to keep historical context in mind. To that point, our chart this week examines both the 10-year annualized returns and standard deviations for eleven different asset classes to better understand the long-term performance profiles of each one. As displayed in the chart, the real estate space, as measured by the NCREIF index, has posted strong returns in the last decade as well as a low standard deviation (though the illiquid nature of the asset class may lead to some volatility smoothing). Equities have tended to exhibit higher levels of return and standard deviation than fixed income, while Small Cap indices have notched both higher returns and volatility than their larger peers across the geography spectrum. Interestingly, each of the asset classes profiled in the chart has yielded positive performance in the last 10 years with the exception of one: commodities. For the 10-year period ending September 30th, 2021, the S&P GSCI posted an annualized return of -4.8%. Additionally, the index has experienced an annualized standard deviation of 21.4% during that same period, which is again the most extreme of any of the asset classes in the chart above. Put simply, commodities have exhibited both the lowest returns and highest levels of risk of any major asset class in the last 10 years. As investors assess recent strong performance from the space and look to the future, it is crucial to avoid recency bias and keep history in mind. Prudence dictates a diversified approach to asset allocation in order to hedge uncertainty and achieve optimal risk-adjusted returns.

Print PDF > Commodities: The Full Story

 

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.

What Does Fed Tapering Mean for U.S. Yields?

Last week, Federal Reserve Chair Jerome Powell indicated the potential tapering of bond purchases at some point in the future aimed at weaning the U.S. economy off the large-scale monetary stimulus that has been necessary during the COVID-19 pandemic. As exhibited by the current forward rates displayed in this week’s chart, the forecasted Fed tapering may result in gradual increases in the 10-year U.S. Treasury yield in the coming months. Since yields move opposite prices, the Fed’s expected Treasury-buying reduction is leading the Treasury forward market to anticipate prices to potentially decline with the lowered demand and yields to rise. Likewise, as the U.S. economy gradually recovers from the pandemic, the Treasury forward market might also be pricing in reduced Treasury purchases from the broader market as investors switch to riskier growth assets such as credit or equities. That said, these actions will likely cause fewer disruptions in the markets than those taken at the onset of the Taper Tantrum, which began roughly eight years ago. Investors were caught off guard when Fed policymakers announced the potential reduction of asset purchases in 2013, which led to a bond sell-off fueled by widespread fears of future price declines. These sales drove down the prices of fixed income securities significantly, causing the 10-year Treasury yield to skyrocket in a very short period of time. In addition to current forward rates, this week’s chart also illustrates this dramatic increase in the 10-year Treasury yield during the Taper Tantrum, including a surge from 1.70% to 2.61% within a three-month window. This movement is in stark contrast with current market expectations, which project the 10-year Treasury yield to increase from 1.50% to only 1.68% over the next nine months.

Although there are ongoing concerns surrounding COVID-19 and the possibility of contagion from a fallout in the Chinese real estate sector that may hamper markets in the near term, investors seem to be reacting to forecasted Fed tapering more favorably than they have in the past. This may be due to the belief that strong economic growth can support the Fed’s gradual pullback of monetary stimulus. It is also possible that the Fed has simply done a better job telegraphing future actions this time around and investors are comfortable with the gradual nature of the forecasted tapering program. It should additionally be noted that tapering will not start immediately, as policymakers are only looking to reduce support when they think the economy can sustain itself as conditions normalize.

Print PDF > What Does Fed Tapering Mean for U.S. Yields?

 

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.

Multifamily Matters

Amid ongoing vaccination progress and an improving U.S. economy, we are seeing a recovery across property sectors – those that were most impacted by the pandemic as well as those that proved relatively resilient, like the multifamily sector. Apartment landlords have greater flexibility to adjust rents at a faster pace than other core sectors, allowing the group to better adjust to landscape changes accelerated by the COVID pandemic and near-term inflationary trends. This, in turn, gives investors the opportunity to position their portfolios to capitalize on these relative advantages.

Already, overall apartment occupied stock has increased to a level 20% above the prior 2000 peak. This demand has driven up effective multifamily rent growth, as seen in the chart above. While expected to moderate from here, national apartment rent growth is forecasted to stay above recent levels, increasing an average of 4.7% and 4.5% in 2021 and 2022, respectively1, driven by ongoing economic expansion and an expected hiring boom. The U.S. economy is expected to add an estimated 12 million new jobs between 2021 and 2023, particularly impacting demand across sunbelt regions and tech hubs, where suburban rentals have outperformed and urban core sub-sectors have rebounded. ² On an ongoing basis, flexible work from home policies will impact where people prefer to live, likely pushing the demand for additional living space and driving effective rents across unit types.

From here, with the added uncertainty brought on by COVID-19 variants, we may see multifamily demand and rent continue upward, or we may see the sector lose momentum from increasing supply or the downstream effects of the recent end to the eviction moratorium. Ultimately, we will continue to look for the best risk/reward opportunities in the evolving real estate space, helping our clients maneuver through the changing dynamics.

1 Real Page, CBRE-EA, Clarion Partners Investment Research, Q2 2021. Note: U.S. apartment rent growth forecast is provided by RealPage as of July 2021

² Moody’s Analytics, CBRE-EA, S&P CoreLogic Case-Shiller National Home Price Index, Clarion Partners Investment Research, August 2021

Print PDF > Multifamily Matters

 

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.

Private Credit: Consistency is Key

We are all familiar with adages like “consistency is the key to success” and “excellence is mundane”. For private credit, consistent returns achieved in a straightforward way bring these statements to life. Recent data1 has shown that from 2004 to 2021, U.S. private credit has generated positive or flat performance throughout the economic cycle – from expansion, to late cycle cooling, through a recession and into a turnaround. The same cannot be said for U.S. high yield and leveraged loans, which have historically contracted during recessionary periods. Private credit has outperformed both high yield and leveraged loans during expansionary and late cycle stages, only underperforming in the turnaround phase when the ISM Manufacturing Index is less than 50 and rising. The straightforward, perhaps ordinary nature of these loans, loans to businesses from non-bank lenders, makes the asset class even more interesting in our opinion. Marquette advocates allocating to private credit in order to capture two premiums – yield premium and structure premium – which are especially compelling in today’s low interest rate environment. Moreover, the data shown in the chart above gives quantifiable evidence that the asset class is also a solid diversifier to a traditional fixed income allocation. We continue to find attractive managers and strategies in the market for investors who already have a dedicated private credit allocation and would be happy to further discuss with others interested in the space.

1https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-alternatives/mi-guide-to-alternatives.pdf

Print PDF > Private Credit – Consistency is Key

 

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.

Taking the PEPP Out of the Eurozone’s Recovery?

Amid concerns over the Delta variant and signs of a sharp slowdown in the global economic rebound, many central banks have signaled that they will keep monetary policy loose over the near-to-medium term. U.S. Federal Reserve Chairman Jerome Powell, at the annual Jackson Hole summit on August 25th, maintained that rate hikes were not imminent. Though, on the spending front, Powell did indicate tapering bond purchases may be on the horizon, as long as economic progress continues. We expect to hear a similar narrative at this Thursday’s European Central Bank meeting, with a subtle caveat. Given how well the European economy has rebounded, the ECB is expected to slow the pace of their €1.85 trillion asset-buying program — the Pandemic Emergency Purchase Programme (PEPP) — in the fourth quarter.

The chart above shows monthly net bond purchases made under the PEPP since its inception in March 2020. There was a substantial injection in the first four months of the pandemic, which then decreased as the first wave waned and lockdown measures relaxed. Bond purchases remained at or below €70 billion for the next seven months. However, in response to rising bond yields, the ECB increased PEPP purchases in March 2021 and has kept them at a higher pace since. At the coming meeting, ECB officials are likely to agree to trim PEPP bond purchases to roughly €60 billion per month for the remainder of 2021, a 25% drop from the current pace of €80 billion per month.

What impact will this modest tightening have on the European Union’s economic recovery? The pan-European market benchmark, the STOXX 600 Index, posted its seventh straight month of gains in August, the longest winning streak since 2013, on the back of strong corporate earnings, lower unemployment, an adult population that is 70% fully vaccinated, and continued accommodative fiscal measures. We expect ECB hawks to argue for the need to curtail the current inflation trajectory, citing its potential to outpace expectations given supply chain bottlenecks and resurgent household demand. Inflation, as measured by the Eurozone HCIP, was 3% at August month-end, above the ECB’s 2% target. On the contrary, more dovish members will likely be more concerned with ramping up the existing ongoing asset purchase program once PEPP ends. As COVID-19 variants test the need for further abatement measures and restrictions in Europe and around the world, central banks are under increased scrutiny. Monetary policy decisions, particularly the pace of tapering and rate increases, will have lasting effects on global markets for the remainder of 2021 and the next several years.

Print PDF > Taking the PEPP Out of the Eurozone’s Recovery?

 

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 Turn of the SKEW

Domestic stock indices have rebounded from pandemic-induced lows exhibited in the spring of 2020 with relative ease, and U.S. equity market volatility has remained largely muted since that time as a result. The CBOE Volatility Index (“VIX”), a popular measure of expected volatility in the S&P 500, ended August at a level of 16.6, below the index’s 30-year average of 19.5. Based solely on recent performance and volatility levels of broad-based indices, the investor outlook for U.S. stocks going forward appears mostly positive. That said, other gauges of sentiment may indicate more discord among market participants. The CBOE SKEW Index (“SKEW”) is one such barometer. Unlike the VIX, which uses at-the-money S&P 500 Index options to assess expectations of near-term market fluctuations, the SKEW examines the implied volatility of out-of-the-money options to gauge perceived U.S. equity market tail-risk, or the chances of an extreme price change in the index. The SKEW Index ended August at a level of 155.9 after reaching an all-time high of 170.6 in late June of this year — both figures are well above the 30-year average for the index of 120.5. The recent upward movement in the SKEW indicates that investors have grown increasingly wary of an outsized move in domestic equity indices in the last several months.

It is important to note that an elevated SKEW Index is not necessarily a harbinger of a tail-risk event. Since 1990, the average 30-day return for the S&P 500 Index subsequent to the SKEW spiking into the 90th percentile of its history was roughly 0.9%. The inverse is also true — extreme S&P 500 returns are not always precipitated by an elevated SKEW Index. In the two years leading up to the Tech Bubble Crash and Global Financial Crisis, the SKEW averaged levels of 115.4 and 116.6, respectively, both of which are below the long-term mean for the index. All of that said, there are obvious risks currently facing markets that could lead to pullbacks and may be contributing to heightened SKEW measures. For instance, valuations of most U.S. equity indices remain elevated relative to historical norms and heightened inflation could ultimately prove less transient than currently expected by market participants. Additionally, the S&P 500 Index has experienced a maximum drawdown of just 4.1% so far this year, well below the median annual drawdown for the benchmark of 9.7% going back 30 years. While this data point alone does not portend a correction, a near-term drawdown is certainly possible given the myriad factors at play. In light of the current landscape, we believe it is imperative for investors to remain diversified across the asset class spectrum in order to gain exposure to a potential continuation of recent positive equity performance while also helping to protect portfolios in the event of a correction.

Print PDF > The Turn of the SKEW

 

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.