We Talk Alternatives - Plus Meet Our Newest Teammate, Max!

Give a warm welcome to our new hire Max Bennett! Jake sits down with Max to talk about what drove him to TEN and how he sees himself making an impact on the team.

TEN CAPITAL Investing Insights

Friday, February 24, 2023

We Talk Alternatives – Plus, Meet our Newest Teammate, Max!

FIVE THINGS YOU SHOULD KNOW

Equity Markets – were lower this week with U.S. stocks (S&P 500) down -2.67% while international stocks (EAFE) fell -2.78%.
Fixed Income Markets – were lower with investment grade bonds (AGG) down -0.88% while high yield bonds (JNK) fell -0.43%.
China Says Enough – as we land on the one-year anniversary of Russia’s brutal invasion of Ukraine, China has stepped in as discussions with Moscow have taken a turn toward a ceasefire. President Xi of China has outlined a ceasefire in a 12-point proposal aimed at ending the war for good. The proposal heavily favors Russia as it includes a measure which would ‘freeze Russian troops in place in Ukrainian territory’ and end all UN sanctions, says Bloomberg.
Biden in Ukraine – President Biden made a covert trip into Ukraine by rail from Poland on Monday. This is the first time he has entered Kyiv since the invasion and sought to solidify the strong ties and backing of the West. In his speech, he criticized Putin for ‘choosing war’ and re-affirmed Ukrainians that the United States will provide them with anything they need. The visit was met with both criticism and applause by government officials stateside.
Key Insight – [VIDEO] Give a warm welcome to our new hire Max Bennett! Jake sits down with Max to talk about what drove him to TEN and how he sees himself making an impact on the team. [ARTICLE] For this week, our Investment Strategist, Ryan, breaks down alternative investments and highlights why we use these particular strategies within portfolios at TEN.

INSIGHTS for INVESTORS

What are Alternatives?

The alternative investment landscape has continued to become a more prominent topic of discussion in prudent portfolio management. But, before we dive into how they can be beneficial and how they’re implemented, it’s important we first answer the question, “what is an alternative investment?”. It is worth noting the term “alternative” can have many different definitions and uses within the industry, but generally speaking we define them as investments and strategies that have little to no correlation to traditional asset classes (e.g., stocks and bonds). While alternative strategies are nothing new, for much of their history they have only been available to ultra-high net worth individuals or institutions through expensive hedge funds or private placement vehicles. However, recent technological advancements and lowered costs to access these more niche areas of the market have allowed everyday investors to utilize and take advantage of their attractive risk/return profiles within their own portfolios. Today we’d like to break down the benefits they can provide and cover the different types of alternatives available to investors.

Why Use Alternatives?

As many of you are aware, the key to any balanced portfolio is an attractive risk/return profile in-line with a client’s goals and risk tolerance. First and foremost, alternative investments seek to provide overall diversification by accessing less traditional financial instruments or asset classes that serve as compliments to an investor’s core equity and fixed income exposure.

One potential benefit is helping reduce the effects of equity bear markets and rising interest rate environments. Due to their low correlation to general stocks and bonds, alternatives can provide relative outperformance and decreased volatility during times of weakness in core asset classes. Greater portfolio diversification helps clients better navigate volatile market environments by providing a smoother ride through drawdowns, which can greatly improve an investor’s ability to avoid emotional selling at inopportune moments, maintain their long-term investment perspective, and potentially participate in subsequent rebounds.

As highlighted in the chart above, alternatives have historically experienced strong outperformance during equity drawdowns, with a diversified basket of alternatives outperforming the S&P 500 on average between 13 and 47 percentage points when the S&P 500 experiences drawdowns greater than 15%.

The same scenario also occurs during rising interest rate environments. As shown below, alts have historically outperformed the Bloomberg U.S. Aggregate Bond Index by between 3 and 25 percentage points when rates have risen. As we saw in 2022, an increase in interest rates has a negative effect on the returns of investment grade fixed income. Alternatives historically low volatility (0.1 beta) and correlation (0.1) to investment grade bonds means they can help provide differentiated sources of return to offset negative timeframes in bond markets.

Types of Alternatives

While we could dedicate 100 pages exploring the many different types of alternative investments, we wanted to highlight some of the most common ways investors participate in this space.

Real Estate

Real estate has long been considered the most utilized form of alternative investments and can be accessed in a variety of ways, including public and privately held real estate. Historically, exposure to real estate has carried a correlation of approximately 0.6 to the general stock market and 0.05 to bonds (1 being perfect correlation), while combining some benefits of both. Like equity markets, real estate can experience strong price appreciation/growth that can be additive to a portfolio’s total return expectations. Meanwhile like bonds, real estate can be a strong driver of consistent income through rent and dividend distributions. Real estate exposure has long been a major component of TEN Capital’s high-income series of strategies.

Private Equity

Private equity is a type of alternative investment that allows investors to purchase shares in privately held companies, often through investment funds managed on behalf of investors and institutions. Private equity funds are investment partnerships that acquire and manage companies they believe can be sold for a gain later. Capital for these acquisitions come from outside investors and are usually supplemented by debt. Due to the nature of this space, private equity funds are often limited to accredited or qualified purchasers due to their higher minimums and longer-term structures but have the potential to generate attractive long-term returns.

Liquid Alternatives

As their name may give away, liquid alternatives are mutual funds or ETFs that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. Unlike some of the alternatives discussed prior that may only provide quarterly or annual liquidity, liquid alts can be allocated or sold daily. This drastically lowers the barrier of entry, making it more accessible to individual investors. The range of liquid alts is vast, with each type providing different risk/return profiles. We have provided a helpful chart below that breaks down some of the most used forms of liquid alternatives.

Conclusion

In conclusion, alternative assets classes and strategies continue to provide great risk-adjusted metrics within a diversified portfolio and remain a major component of our portfolios here at TEN Capital. When used prudently, these unique correlation profiles within a portfolio may provide improvements to clients’ diversification and risk-adjusted portfolio metrics. Please don’t hesitate to reach out to your advisor with any questions you may have on the alternative landscape and how we best utilize them within our strategies!

Have a great weekend,

Ryan and the team at TEN Capital

DATA, JUST THE DATA

Data points this week included:

U.S. Jobless Claims – fell by 3K to a claimant count of 192K for the week ending February 18^th. The reading was slightly below expectations of 200K and is the lowest reading since the record of 183K in late January. The four-week moving average rose by 1.5K to 191.2K.

U.S. GDP (Est.) – the second estimate for Q4 2022 GDP has come in at 2.7%, which is slightly lower than the 2.9% advanced estimate. Consumer spending edged up 1.4%, the least since Q2 2022 and a bit below the 2.1% advanced estimate. Goods spending fell (0.5%) as spending on services rose 2.4%. Exports fell lower to (1.6%) from (1.3%) and imports slightly rose, but still fell (4.2%) from (4.6%). Residential investment contracted a smaller pace of (25.9%).

U.S. PMI Composite Flash – shot up to 50.2 in February after a previous reading of 46.8 and crushing forecasts of a rise to 47.5. This latest reading was the first in the expansion zone since June of 2022. The private sector was mostly unchanged, but the service sector output rose slightly, and new export sales softly declined. Job creation rates rose its fastest since September and input cost inflation was its slowest since October 2020.

U.S. New Home Sales – new single family housing sales jumped 7.2% MoM to annually adjusted rate of 670K in January. This is the highest reading since March 2022, and crushed forecasts of 620K. The median price of new homes sold was $427.5K, and supply edged down to 7.9 months’ worth (the lowest since May 2022).
U.S. Personal Income – rose 0.6% from the previous month in January and bumped up from 0.3% the month previous. This still missed the mark of 1% growth as the rise in income was led by an increase in compensation in private wages and salaries in both service and goods-producing sectors. Government social benefits fell in January with the expiration of the child tax credit but were partially offset by an increase in Social Security.