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Alternative Investments on the Rise
In the later stages of a bull market when traditional stock and bond markets are more volatile, having an allocation to alternative investments can help cushion a portfolio. Alternative investments get their name because they include any asset outside of conventional stocks, bonds or cash. Alternatives typically include private equity, hedge funds, real estate, commodities or collectibles like art or wine. These types of investments can offer diversification strategies for reducing risk and attaining excess returns.
Alternative investments are continuing to grow in popularity.
Recently, two 10-year studies were released which confirm this growth trend.
Pensions & Investments magazine reviewed asset allocations of the 49* largest private foundations in the US. Allocations to "other assets," which
typically refer to private equity, hedge funds and real estate, added up to
$70.6 billion, or about 40% of total assets in 2007. But by 2016, such investments had grown to $136.3 billion, or about 60% of total assets. That is a
29.3% increase from 2007, and most
of that increase came at the expense of traditional asset classes like stocks and bonds.
Much of this increase has been in response to the financial crisis of 2008. Savvy investors have chosen non-traditional alternatives as a way of increasing their diversification into assets that don't necessarily move in lock step with equity and bond markets.
It's true that alternative investments tend to be less liquid, and investing in them is more commonly associated with institutional investors such as those cited in the two studies above. However, the options for private investors to gain access to alternatives is growing. New Market Wealth enjoys a strategic partnership with Cliffwater LLC, an institutional investment consultancy that advises large public pension plans, endowments and foundations. As a result of our partnership, individual clients can gain exposure to investment opportunities in private equity, private debt, MLP's, BDC's, and hedged equity that are usually reserved for institutions. With market volatility on the rise, it is important for investors to consider the full range of investment options available to them.
*Pensions & Investments looked at the 50 largest private foundations, but the $3.3 billion Carnegie Corporation of New York foundation was not included in aggregate totals as it had not yet filed for tax year 2016.
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Last week volatility soared and equity markets fell sharply. Stocks started off strong after news of progress on US / China trade talks between Presidents Trump and Xi. But stocks began falling after mixed messages about the trade situation from the White House and the arrest of a high-level Chinese business executive on suspicion of violating Iranian sanctions. Economic signals were mixed during the week and US financial markets were closed on Wednesday in observance of a national day of mourning due to the passing of former President George H.W. Bush.
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> Jobs:
Last week's lackluster jobs report will not raise any urgency for the Federal Reserve to tighten monetary policy and may raise talk of fewer rate hikes to come in 2019. The November unemployment rate held steady at 3.7%, while nonfarm payrolls rose 155,000 and average hourly wages grew at 0.2%, both of which were on the low side of expectations.
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| Source: Markets Insider / Commodities |
> Manufacturing:
The Institute for Supply Management's manufacturing index was robust in November. The headline composite of 59.3 was 1.6 points higher than October, easily beating expectations. For context, readings above 50 signal month-to-month growth for US manufacturing as a whole, and readings above 60 signal national GDP growth of 5%.
> Recession Signal:
As noted last week, the yields on five-year Treasury notes fell below those on three-year notes for the first time since 2007. A yield curve inversion is viewed as a bellwether for recession and while it's important to take notice of last week's move, many economists say the chance of a near-term recession are slim, pointing to strong hiring and consumer spending. As seen in the exhibit below, over the last 7 recessions it has taken an average of 20 months between the first inversion and the start of a recession.
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As investors we care about the
Consumer
Price
Index which gauges inflation by measuring changes in the prices of basic goods and services.
November's CPI figure came out this morning and there was no change from October (the year-over-year rate rose to 2.2%).
But for 35 years, PNC Bank has calculated a different kind of CPI each December - the
Christmas
Price
Index. Using sources like a Philadelphia nursery for the "pear tree," a local ballet company for "ladies dancing" and a musician's union for the salaries of drummers and pipers, they calculate
the prices of the twelve gifts from the classic carol, "The Twelve Days of Christmas."
In 2018, the tight labor market drove up the cost for each of the 12 items named in the song. The CPI measured $39,095 representing a 1.2% increase over last year. Their second measure, known as the "True Cost of Christmas" index, represents the cumulative cost of all the gifts when you count each repetition in the song (364 gifts). If you were to buy your true love all those gifts this year, it would set you back $170,609. The chart below tracks the CPI since 1984.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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