Asset TV U.S.’s Post

Transcript

Welcome to Asset TV. I'm Gillian Kemmerer. It is out with the old and in with the new. Whether we look at the roster of fresh faces playing the US Open tennis tournament in Flushing Meadows this month or we're discussing a new asset allocation approach to utilizing private markets. Today, I am joined by Brendan McCurdy and Carlin Calcaterra of Aries Wealth Management Solutions. Who share both a belief that investing up to 50% of a portfolio and private markets may be appropriate for many investors and a mutual love of tennis. Brendan and Carlin, thank you so much for taking the time to join us. And Brendan, I'm going to start with you. It's such a special time to be in New York for both of you. And I'd love to talk a little bit about why, especially since we coincide with the US Open. Yeah, well, Carlin and I were talking beforehand and we both agree that the two weeks of the US Open, our favorite two weeks in. In New York each year, absolutely. I've I've lived in. I lived in New York City for almost 15 years and never missed the US Open. It was actually the one weekend a year that I always met with my dad. And so it has a really special place in my heart and it always gets me thinking about how much I've learned about life and and also about investing just as a results of this simple game of tennis. And in fact. Both tennis and investing can be seen as quite simple. It only takes 48 points to win a tennis match. But just like investing, the difficulty is in the details because those 48 points have to be right in a row And as tennis players, you know, we, we can definitely appreciate that that's nearly an impossible thing to do and. Just like investing, we're looking for ways to have more options, more tools to be able to adapt and and win the match. And when we think about how to construct portfolios, private markets can help us do just that. Brendan, we've heard you call for up to 50% in private markets for private wealth. And is that driven by something that you're hearing from the marketplace? Yeah, absolutely. First and foremost, there's big demographic shifts that are leading to this call for 50% private markets. So for instance, over the next 20 years, there are many that expect up to 84 trillion in wealth to change hands between the older generations and newer generations and so the. Baby boomers are the wealthiest generation. They have the most money right now and they're, you know, well into retirement at this point and and harvesting their portfolios. And so they're looking for ways to generate more income than they've ever been able to generate off of traditional stocks and bonds. And then on the other side, you have the next generation, affectionately known as the the next Gen. who will eventually have much of that wealth passed to them and the majority of that next Gen. Does not believe that they can reach their goals with traditional stocks and bonds and so they're looking for ways to enhance the returns in their portfolio. Maybe still with tennis on the mind of we see that both the players and the game have changed from what we faced in the past. So Brendan talked about the players, the demographic changes that we've seen, but we've also seen the game itself changed. So the structural changes and markets themselves which really to us re under score the need for a new approach to portfolio. Construction, we are seeing a secular change in interest rate policy that's coupled with persistent inflation, which we believe could lead to sustained periods of the high correlations between traditional stocks and bonds that we all live through in 2022. In addition, we've seen in large cap stocks trading at high valuations top decile valuations for many years. It has heightened equity risk and will squeeze the equity risk. Romeo potentially with the outcome of of not of forward rates of return not being supported by traditional core equity. And then finally we see we, we feel that in the wake of the collapse of of Silicon Valley Bank that we are undergoing significant regulatory changes which are only going to further the need for flexible capital and financing creative financing solutions which increasingly fall outside of the public. And when you say private markets, Brendan, which specific asset classes do you have in mind? Yeah, well, they're, you know, private markets is a is a pretty broad category and there are really a few distinct asset classes that we see within the private markets. So first is private equity. And private equity is just simply owning and growing private businesses and most investors use private equity to enhance returns. So just as an example, $100,000. Invested 30 years ago in the stock market would have grown to 1.1 million, but that same 100,000 invested in private equity 30 years ago would have grown to 6,000,000. So six times the return over the last 30 years on 1/3 of the volatility. So there's just this great cumulative return benefit that you get by consistently making 300 to 500 basis points of extra return in private equity. Then second, there's private debt or private credit. And this is just. Probably making loans privately to companies and very often to to private companies and investors tend to get about 200 to 400 basis points of extra yield per year in private debt versus public market equivalents. And just as an example right now new first lien loans to the highest quality loans that we're making right now, I have a yield between 10 and 13%. And then the final, the third category that we look at is private. Real assets and private real assets consists of both private real estate and private infrastructure and investors tend to use private real assets for their diversification benefit because they tend to move differently and at different times and the rest of the portfolio. And so that can help to smooth out the roller coaster ride of of total portfolio returns. Carlin, in light of the traditional view on allocation to alternatives, I think this begs the question, isn't 50% a lot? Optically it may seem that way, but context matters. So when we start to think about first principles of portfolio construction and really what we're looking or investors are looking to achieve, we see similar investment objectives shared with individuals that that arguably are shared with with institutional investors. And when we look at institutional asset allocations, they're on average they're using. Upwards of 50% in, in many cases more in their portfolios and they've been allocating this way for many years. So in our view the the advisor LED market is there, there's a place for an increase in the allocation of private markets and the advisor LED market 50% target is appropriate and it's not necessarily an arbitrary choice, it's it's really one that's dictated. By the risk and return objectives that are that we're trying to accomplish for the for the end client. Brendan, how do you get to 50%? Is that number scientific or hypothetical? There is a lot of science behind it. One of the things that Carlin and I find when we work with advisors is there tends to often be a misunderstanding between capital allocation and the contribution to risk. And So what we mean by that is if you take a portfolio and it might have lots of different slices to the pie, so it might look very diversified, but let's say it's roughly 40% different types of equity and 60%. Different types of traditional fixed income when you actually decompose where the risk is coming from and that 4060 portfolio, what you'll actually find is that 88% roughly in somewhere between 85 and 95% of the ups and the downs and that pretty conservative portfolio are actually being driven by the portions of of equity. And if you decompose that even further, if you think about diversifying asset class like high yield for instance, high yield. Many investors won't be surprised to know that if the equity markets go down, high yields typically going to go down to a certain extent too. And so there's a good portion of equity. It actually tends to be about 1/3 of high yield return and risk is driven by what happens in the equity markets. And so when you start to decompose all the different pieces of a portfolio, what you find is that there's a tremendous amount of equity risk. And so investors are living and dying by the sword typically of just one type of risk or or asset class. So we actually build portfolios from that foundational factor basis. We build a diversified factor risk budget. We say how much exposure do we want to equity and interest rates and credit and different diversifying factors alpha and once we have that diversified risk budget, then it's much easier from there we can build up and say, OK, what's our appropriate asset class mix that gets us to that diversified risk budget and that's actually where this portfolio comes from. And our, you know the 50% private markets that that we talk about. So there is a lot of science ultimately that goes into it and it's very nice that we don't need to do a lot of kind of artificial constraining to get to a nice outcome that way. And would you say that this is suitable for all investors or specifically certain types? Yeah, it's a good question. We find it's an appropriate and suitable for many different types of investors. And so just to give you an example or a couple of examples if we have a more growth and income type. Investor. So let's say it's an individual that's maybe approaching or into retirement or maybe it's a corporate or public pension plan, but an investor that needs a lot of income. You're going to find the whole tilt our portfolios much more towards. First of all, traditional fixed income is a real ballast in the portfolio. But then really healthy allocations to private debt for the income and the yield component, meaningful allocations to private real assets to to help diversify and what will be minimized in that portfolio's. All types of equity, so both public and private equity. But then on the other hand if we have more of a growth oriented investor, so maybe an individual in the accumulation phase of their life or maybe a smaller mid-size endowment or foundation that has a multi decade time frame. You're going to find that portfolio then starts to minimize the core fixed income, starts to minimize the the private debt. We'll still have a really healthy allocation to the real assets for their diversifying properties and then you'll find much more in. The private equity side to help drive and enhance returns and and so when? We start to think about the asset allocation. It's as we were talking about earlier, it's also aligning with the ultimate end objective of the client and the experience and the outcome that we're solving for. So what Brennan is describing ultimately results in outcomes that are, for example, 50% higher returns. 2/3 the amount of risk and draw down. Importantly, equity risk in this portfolio has been cut in half versus the core equity risk of a traditional 6040 portfolio. And when we, and then the Brendan also mentioned the importance of yield for certain types of investors, A50 up to a 50% allocation in private markets can also almost double the yield versus a traditional 6040. So again, reframing in the context of the objective. The end client is really is really important, but also private markets can be used as a unified solution to thread the needle between solving for different types of adjectives, which on the surface may seem competing. Higher returns for less volatility, but also high higher income. Could in the old world needed to be all very segregated into different types of portfolios when in fact utilizing private markets to a greater extent can help create accurate, can help create those outcomes in a in a single in a single unified way. And Carla, and I'm sure this is a question you get asked a lot, Is it actually possible for private wealth investors to gain access to these asset classes? The answer used to be no and going back to the earlier. Question about isn't 50% a lot? Well, one of the reasons that optically for the advisor LED market we haven't seen allocations of this size is actually due to the inaccessibility of these asset classes for that part of the investor population. What we've seen over the past three years is not a change in the underlying investment strategies. These private markets have been as we talked about utilize and institutional portfolios. To the and the benefit of the end investor for many years, what's changed is the packaging around it. So the introduction of more investor friendly vehicles, tender offer funds, interval funds, BDC's for private credits, all of these are starting to replace or complement offerings of traditional qualified purchaser or LP funds. What this practically means for the advisor are things like lower. Investor minimums upfront, easier reporting, so using 1090 nines instead of K ones and also the cash management itself around private markets which in a traditional LP fund is is born. That risk and and burden is borne by the advisor themselves in newer perpetual life or Evergreen structures that is taken on by us by the asset manager within the fund. So all of a sudden you you have. You are able to not only access practically but also pragmatically port manage on a on a on a daily basis. These strategies more effectively as part of a broader portfolio.