Investing Trends Beyond the Public Markets

Summary

The transcript discusses the shift in investment strategies towards alternative investments, such as private equity and real estate, in response to a more accommodating environment for investment post-peak rates. The conversation highlights the importance of CPI and labor market data in influencing investment decisions and the preference for municipal bonds over Treasuries. It also touches on the appeal of ex-U.S. investments, particularly in Europe and emerging markets, and the challenges of macro risk associated with China. The discussion concludes with insights on private markets, noting opportunities in real estate and private equity due to the current valuations and lack of large capital investors.

Takeaways

• 📉 The speaker's firm has seen a shift from traditional investments to alternative investments over the past six years, focusing on both income and growth opportunities.
• 💹 Investors are looking at private equity, real estate, and private credit as part of the alternative investment trend.
• 🚶‍♂️ The current environment is described as accommodative for investment, but there's a waiting game due to the peak in rates that has not yet passed.
• 📈 The expectation for the full year is a range of 2 to 4, but data points such as CPI and labor market conditions could influence this towards the lower end.
• 🔄 Volatility in monthly CPI readings is noted, but there's a longer-term trend of decreasing inflation.
• 🏢 The labor market's resilience is highlighted, but there's concern that if rates remain high, it could lead to a recession despite the Fed's efforts.
• 🛠️ The speaker's colleague is open to equity risk, while the speaker himself is considering the two-year treasury at 4.69%.
• 🏦 A preference for municipals over Treasuries is expressed for taxable investors, with a tactical allocation to shorter treasuries due to their current richness.
• 🌍 Ex-U.S. investing is seen as exciting, with potential opportunities in Europe and emerging markets, but it requires a long-term investment horizon and acceptance of macro risks.
• 🤝 Clients are expressing a desire for exposure to alternatives like hedge funds, private equity, and private credit, and are looking to move away from public market volatility.
• 🏗️ Real estate is highlighted as an area of opportunity within private markets, with significant deal flow expected from funds needing to sell assets.

Q & A

How long has it been since the group had 60 to 40 people?

It has been probably six years since the group had 60 to 40 people.

What type of investments have a significant portion of the group moved into?

A significant portion of the group has moved into alternative investments, including both income and growth alternative sides.

What are some examples of alternative investments mentioned in the script?

Examples of alternative investments mentioned include private equity, real estate, and private credit.

What is the current waiting game in the investment environment?

The current waiting game is for the peak in rates to pass, which has not happened yet.

What are the two key data points that could influence the expectations for the full year closer to two?

The two key data points are CPI (Consumer Price Index) and the labor market.

What is the current stance on the two-year treasury at 4.69%?

There's nothing wrong with a two-year treasury at 4.69% as long as you don't have anything to do in two years.

Why are municipals favored over Treasuries for taxable investors?

Municipals are favored for taxable investors because they offer a more attractive return compared to Treasuries, especially when short munis are rich in value.

What is the perspective on ex-U.S. investing?

Ex-U.S. investing is viewed with excitement, particularly in Europe and certain parts of emerging markets, but it involves taking some macro risk.

What challenges do Bernstein investors face with large-cap U.S. investments?

Bernstein investors face the challenge of finding opportunities in large-cap U.S. investments, such as Mega-cap, and balancing them with the next potential growth areas like Europe or emerging markets.

What is the current trend in the jobs market?

The jobs market has been impressive throughout this cycle, but there is a concern that if there is a disruption, it could be nerve-racking and lead to changes in hiring intentions and even reductions in headcount.

How are investors responding to public market volatility?

Investors are looking to move away from public market volatility, both in equity and fixed income, by investing more heavily in private equity, primaries, secondaries, and real estate.

What opportunities are seen in the private market given the current conditions?

Opportunities in the private market include real estate funds needing to sell assets, off-market secondary transactions, and private equity and venture capital where valuations have come down due to the lack of big capital investors.

Outlines

00:00

📈 Shift Towards Alternative Investments

The first paragraph discusses the shift in investment strategies among clients who have moved away from traditional markets to alternative investments, such as private equity, real estate, and private credit. The conversation highlights the anticipation of a more accommodative environment for investment post the peak in rates. The discussion also touches on the importance of CPI and labor market data in influencing investment expectations and the potential risks of staying at current rates. The preference for municipal bonds over Treasuries for taxable investors is mentioned, along with a strategic approach to portfolio maturity structure.

05:05

🌍 Opportunities in Ex-U.S. and Private Markets

The second paragraph focuses on the excitement around ex-U.S. investing, particularly in Europe and emerging markets, as the next growth opportunities. It acknowledges the valuation play in Europe and the macro risk associated with China. The importance of being a long-term investor and correctly sizing investments due to the inherent volatility is emphasized. The paragraph also addresses the private market, noting opportunities in real estate due to the need for funds to sell assets and the decrease in valuations in private equity and venture capital due to the lack of big capital investors.

Keywords

💡alternative investments

Alternative investments refer to financial assets that do not fall into the conventional investment categories, such as stocks, bonds, or cash. In the context of the video, these include private equity, real estate, and private credit. They are seen as a way for investors to diversify their portfolios and potentially achieve higher returns, especially in a more accommodative investment environment post-peak interest rates.

💡CPI

CPI stands for Consumer Price Index, which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a key indicator of inflation and is closely watched by economists and policymakers. In the video, the speaker discusses the volatility in month-to-month CPI readings and its implications for interest rates and investment strategies.

💡labor market

The labor market refers to the collection of all labor services available for work, including the physical and mental labor of individuals seeking employment. In the video, the labor market's condition is discussed as a factor that could affect the economy and investment strategies, particularly in relation to the Federal Reserve's actions and companies' hiring intentions.

💡two-year treasury

A two-year treasury is a short-term government debt security issued by the U.S. Department of the Treasury with a maturity of two years. It is considered a safe investment, but the video discusses the strategy of investing in it in the context of a variable maturity structure for a portfolio and the preference for municipal bonds over treasuries for taxable investors.

💡municipals

Municipals, or municipal bonds, are debt securities issued by states, cities, and other municipalities to fund public projects. They are typically tax-exempt for federal income taxes, making them attractive for taxable investors. In the video, the speaker expresses a preference for municipal bonds over U.S. Treasuries due to their tax advantages and the current market conditions.

💡ex-U.S. investing

Ex-U.S. investing refers to the strategy of investing in assets or markets outside the United States. This approach allows investors to diversify their portfolios geographically and potentially benefit from economic growth in other regions. The video discusses the excitement around ex-U.S. investing, particularly in Europe and emerging markets, despite the associated macro risks.

💡EPS growth

EPS, or Earnings Per Share, growth refers to the increase in a company's earnings per share over time. It is a key financial metric used by investors to assess a company's profitability and growth potential. In the video, the speaker notes that while EPS growth in Europe may not keep up with the U.S., investing there is more of a valuation play.

💡macro risk

Macro risk refers to the potential for losses due to large-scale economic factors that affect the overall market or a broad market segment. This includes risks associated with economic indicators, political events, or changes in regulatory environments. In the video, the speaker mentions that investing in certain regions, like China, involves taking on macro risk.

💡private equity

Private equity refers to investments in private companies that are not publicly traded on a stock exchange. This form of investment typically involves buying a controlling stake in a company or a significant minority stake, with the aim of improving the company's operations and value through active management. In the video, private equity is discussed as an alternative investment that investors are showing interest in, especially as a way to move away from public market volatility.

💡public market volatility

Public market volatility refers to the fluctuations in the prices of securities, such as stocks and bonds, traded on public exchanges. These fluctuations can be caused by various factors, including economic conditions, investor sentiment, and company performance. In the video, the speaker discusses investors' desire to reduce exposure to the volatility of public markets, which was highlighted by events like the COVID-19 pandemic and other market downturns.

💡real estate funds

Real estate funds are investment vehicles that pool capital from multiple investors to purchase and manage income-producing real estate properties. These funds provide investors with exposure to the real estate market without the need to directly own or manage properties. In the video, the speaker points out that there are opportunities in real estate funds, especially those that need to sell assets from funds raised 10-12 years ago.

Highlights

The firm's client base has reduced from 60 to 40 people over the past six years.

There has been a significant shift towards alternative investments, including private equity, real estate, and private credit.

Investors are seeking a more accommodative environment to invest across various asset classes, with a particular focus on the post-peak rate scenario.

Expectations for the full year are in the 2 to 4 range, with data points such as CPI and labor market conditions being key indicators.

CPI readings have shown volatility, but the long-term trend suggests a decrease in inflation.

The jobs market has been robust, but there are concerns about potential disruptions that could affect hiring intentions and headcount.

The Federal Reserve's efforts to avoid a recession may be challenged by sustained high rates.

There is a preference for a variable maturity structure in portfolios, favoring municipals over Treasuries for taxable investors.

Ex-U.S. investing is seen as an exciting opportunity, with potential in Europe and emerging markets.

EPS growth in Europe may not keep up with the U.S., making it more of a valuation play.

Investors need to be prepared for macro risks associated with China and the need for long-term investment strategies.

Clients are expressing a desire for exposure to alternatives such as hedge funds, private equity, and private credit.

There is a trend among clients to move away from public market volatility, both in equities and fixed income.

Private equity and real estate investments are currently attractive due to a lack of large institutional investors.

Real estate funds from ten to twelve years ago still hold assets that need to be sold, presenting potential deal flow opportunities.

The private equity and venture capital markets are experiencing lower valuations compared to three or four years ago.

Transcripts

We haven't been 60, 40 people for probably six years.

So we're throwing darts at 6040. A big chunk of that has moved into

alternative investments, both on the income alternative side as well as the

growth alternative side. So investors looking at private equity,

real estate, private credit, alternative credit of all types.

That's really been the norm for our clients.

And what we're talking about is a more accommodative environment to really

invest across the board. Once we get past this peak in rates,

we're not there yet. So it's a little bit of a waiting game,

but we're getting close. And when you look at the expectations

for the full year, you mentioned that 2 to 4 range.

What data, what data points could draw that to go closer to two, if not one?

Apparently, the signal is calling for nine.

Right. I think there's two that we focus on

most closely. One is CPI.

That's obvious, but we've had some volatility in the month to month CPI

readings, while the longer term trend is still intact that we're dropping that

inflation is coming down. You could get those spikes in monthly

CPI. So that would be one.

And then two is labor. You know, the jobs market has been so

impressive throughout this cycle that if we got a real disruption there, that

would be nerve racking because there's some of us believe that just as the Fed

has tightened and we're starting to see it play out in the labor market, some

companies are getting out in front of this to really start to change their

hiring intentions and even reduce headcount.

And so even though the Fed is working so hard to avoid causing a recession, if we

stay at these rates for much longer, we may end there.

So, Alex, my colleague here, barely. He's a young Turk.

He can go out and take all kinds of equity risk.

I'm thinking about the two year treasury.

4.69%. What's wrong with that trade?

There's nothing wrong with a two year treasury.

As long as you don't have anything to do in two years.

Our view is that it's better to build up right now.

I don't know. Maybe you don't have anything for years,

but our view is it's better to build a portfolio that has a variable maturity

structure to it. We favor municipals for taxable

investors over Treasuries. A little bit of a tactical allocation to

some shorter treasuries just because short munis are so rich.

But I would be in a muni portfolio much faster than I would start to build a

Treasury portfolio today. You're preaching to the choir, Alex.

You to say I'm bored with munis, but apparently that's where I should be

putting money to work. But talking about Alex Interesting,

riskier opportunities. How are you thinking about ex-U.S.

investing? That's where we start to get excited.

Only because it that's the next U.S.. U.S.

large cap, U.S. Mega-cap, Mach seven, etc..

That's now what's next is really our challenge that Bernstein investors look

to us for advice on. And our view is next.

Could be Europe next could be some part of emerging markets.

I think when you look at Europe, you have to acknowledge that EPS growth

there will not keep up with the U.S. So it's more of a valuation play.

And M you have to be okay with taking some macro risk of China.

I think that the numbers out of China have started to slowly improve, but

that's a long path out. So number one, you've got to be a long

term investor. And number two, you've got to size it

correctly, because even though we think it will work, it's going to have some

volatility around it. So, Alex at Bernstein, Private wealth,

to what extent are you do your clients come to you and say, I really want

exposure to alternatives, whether it's hedge funds or private equity or private

credit? And if so, what do you think is a

reasonable allocation to alternative investments?

Your investors have expressed both a desire to invest in alternative

investments, but even in larger numbers, they want to move away from public

markets. So I think the experience of the last

few years 2020 Covid was really scary in public, even though we ended up in a

good place. 21 was terrific, but it never felt

terrific. 22 was really hard.

23 was another year where at the end of the year you couldn't believe how much

money you've made that year because you just didn't feel that way.

So they're looking to get away from public market volatility, both equity

and fixed income volatility, by the way. So I think some of it is absolute

attraction to alternatives. But a bigger chunk is this idea of how

do I get out of the public. And so we have been investing heavily in

private equity, both primaries and secondaries, really excited about fresh

capital right now, getting put to work in real estate.

One of the things I would say across the board in longer dated alternative

investments is that you don't have this big flood of other big institutional LPs

applying capital. There's been some reluctance.

Hence, because of the 2022 public market experience and how these big LPs are

trying to right size their liquid versus illiquid.

So they're taking a year off, maybe two. They definitely hit the time out button

and so we're able to step in. Other groups like us are able to step in

and acquire assets at a much lower price because it isn't as heavily trafficked.

Alex To quickly touch on that, I cover equity capital markets and IPOs.

You're talking about the private markets and some of the issues for LPs and GP's.

Where do you see opportunities within the private market given the disconnect

that you're talking about? I would first point to real estate.

I think there's a number of real estate funds, big multibillion dollar funds

that were raised ten, 12 years ago that still own assets they need to sell,

whether they restructure in a continuation fund or they're looking to

do off market secondary transactions, I think you're going to see some

significant deal flow there. You know, last year, 2023 was the lowest

deal volume in commercial real estate in 25 years.

Yeah. So we have to see the other side.

They're trying to call. And then I think in private equity and

venture capital, you're just not seeing the the valuations that you had to pay

three or four years ago in those private markets.

You're already seeing the lack of big capital investors.

They're bringing valuations down.