March 2017
The Federal Reserve voted on March 15, 2017 to hike the fed funds rate by 0.25%, targeting a range of 0.75–1.00%. The vote was nearly unanimous — nine versus one out of the ten total voters on the Federal Open Market Committee — with Minneapolis Fed President Neel Kashkari voting for no change. This is the third hike after the Great Recession, following the 0.25% hikes in December 2015 and December 2016.
February 2017
Real estate investments are a core part of institutional portfolios and provide returns through a combination of income and appreciation. Different vehicle structures offer options in regards to access, liquidity, and sector exposure. Ownership can be direct through individual properties and separately managed accounts, or indirect through publicly traded real estate investment trusts (REITs), private real estate commingled vehicles, and private REITs. Due to the recent creation of a new real estate sector within the Global Industry Classification system (“GICS”) as well as the current market environment, we feel it is an appropriate time to re-visit the available options for institutional investors to access real estate, specifically as it relates to public REITs. This newsletter examines some of the unique characteristics of public REITs compared to private real estate investments and compares the benefits of private real estate versus public REITs.
February 2017
Active vs. Passive
To this day, significant debate continues about the topic of active versus passive investing in U.S. equities, with the discussion typically centering on the fundamental question of “Is the market efficient?” Active investors believe that the market is inefficient and an informational advantage can lead them to identify investments that will beat their respective indices. Critically, active investing features human judgment with respect to a company’s relative attractiveness and profit realization over an investment horizon. Passive investors, on the other hand, believe the market is efficient and that stock prices reflect all available information which could affect their prices. If markets are truly efficient, then a diversified, low-cost exposure to an asset class would be the best course of action.
January 2017
Similar to past market preview newsletters, we enter the year with a new set of questions. What shape will Trump’s policies take and how will they impact the market? Will the formal start of the Brexit have an impact on portfolios? To what degree and pace will the Fed increase interest rates? These topics among many others are covered in the following articles as we offer our annual market preview newsletter. Each year presents new challenges to our clients, and other headlines will emerge as the year goes on; it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered. Recognizing that many of our clients may not have time to cover the following 30 pages of material, we offer the primary conclusions for each asset class heading into 2017.
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December 2016
On December 14, 2016, the FOMC announced its unanimous decision to raise interest rates by 25 basis points, bringing the target fed funds rate to between 0.50% and 0.75%. This was the first increase since last December’s, with the hike prior to that occurring in 2006 before the Great Recession.
This move was widely anticipated and well-communicated to the markets. As such, fed funds futures carried a 100% implied probability of a hike going into it, and most – if not all – of the hike was already priced into global markets. Markets over the past one and a half days since the hike have remained relatively calm. The 10-year Treasury yield rose by only 12bp to end at 2.6%, while the one-year Treasury yield rose by just 3bp to end at 0.9% and the 30-year Treasury yield rose by 2bp to end at 3.1%. The Core Aggregate bond index and the Intermediate Government/Credit index were down only 0.5%, while the 1-3 Yr Government/Credit index fell 0.2%; the Long Government/Credit index also decreased 0.2%. The Credit Suisse Leveraged Loan index was up 0.1%, the Credit Suisse High Yield index was down 0.3%, and the JPMorgan emerging markets debt EMBI Global Diversified index decreased by less than 0.1%. The dollar rose while gold declined, as expected. The S&P 500 declined less than 0.1%.
November 2016
To the surprise of pollsters, analysts, and much of the American public, Republican presidential candidate Donald Trump trampled predictions by winning the presidential election in stunning fashion.
The long-term impact of Trump’s presidency on financial markets is impossible to predict at this point, given the amount of uncertainty around his expected policies. However, the short-term dynamics surrounding his election win are starting to emerge, and we share with you what we are seeing and hearing in the market in this newsletter.
October 2016
Direct lending is an established asset class that provides a total return to investors typically between that of high yield bonds and mezzanine debt. It is considered private credit because the assets in a direct lending portfolio are loans originated privately between the direct lending fund manager (acting as lender) and the borrowing company. Due to the private nature of direct lending, the asset class produces attractive risk-adjusted returns supported by reduced competition, lower volatility, and favorable negotiation leverage for the direct lender. Since the financial crisis of 2008, direct lending as an asset class has featured unprecedented growth in deal volume as well as assets under management. This growth is attributed largely to post-crisis regulations that effectively forced banks, the traditional direct lenders of the past, to shed their direct lending operations. Non-bank direct lending asset managers have in turn benefitted from the significant rise in direct lending opportunities.
September 2016
While 529 plans have existed for over two decades, recent developments such as the Achieving a Better Life Experience (“ABLE”) Act have provided a new avenue for families with eligible disabled dependents to build a pool of assets that cover qualified disability expenses such as education, housing, and transportation. Like 529 plans, 529 ABLE (“529A”) plans provide a tax advantaged investment vehicle for eligible participants.
September 2016
S&P Dow Jones Indices and MSCI Inc. have announced the creation of a new real estate sector within the Global Industry Classification (GICS) system. Effective market close August 31, 2016, real estate officially became its own GICS sector, whereas it was formerly included within the financial sector. MSCI implemented this new classification change as of this date, but S&P Dow Jones indices will not see this change made until their quarterly index rebalance date of September 16th. Russell indices will not be affected since they utilize a separate classification system from GICS.
August 2016
Given the heightened volatility in financial markets over the past year from the shale crisis to Brexit, investors are rightly concerned about emerging markets debt (“EMD”) allocations. This strategy update examines key fundamentals of emerging markets debt and identifies reasons to retain this asset class in portfolios.
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