Gentlemen, thank you for making time to join us on Private Capital Call.
1. Pandemic as One-Off. Covid-19 seemed like a black swan event, but had similarities (and differences) to the GFC. What felt the same as 2008-09, and what were its unique aspects?
What felt the same as ’08 was the sense that fear had completely taken over and that nearly every investor was searching for any open exit door. What felt different was the how quickly we saw a rebound, in large part due to quick action by the Fed, which at time felt like too much, too soon, but in retrospect was probably the correct approach. We have yet to see what the long term consequences of the intervention are going to be – it’s still too early to judge.
2. Client Concerns. Your firm manages investments for high net worth individuals and their families. What aspects of market behavior last year did you find them to be most sensitive to?
Clients may not have been prepared for how rapid the selloff was, but if they had an appropriate asset allocation mix going in, they were generally able to avoid over-reacting. In some cases the asset allocation mix had to be addressed. Clients also wanted to know where the opportunity was looking beyond the immediate crisis and were open to rebalancing and tactical offensive allocations.
3. Appetite for Yield. Despite a major economic rebound, interest rates seem anchored close to zero. How do you advise clients to think about reaching for yield in the current environment?
Well, it is a trade-off. You cannot really expect to stay fully liquid, take little credit or duration risk, and still generate significant income. Clients that do have considerable income needs will have to accept some measure of illiquidity going forward and some incremental credit risk. However, illiquidity can be managed carefully in line with client investment horizons – that is very much our job – and the incremental credit risk can be managed via diversification and working with the right manager, with a laser focus on principal protection. However, there are some very real constraints to what can be achieved – and those require detailed conversations with clients about their ultimate goals and trade-offs that they are willing to accept.
4. Risk-adjusted Returns. While a “coast is clear” attitude has seized public markets, there are always (as one friend said) “bears in the woods.” What risks should investors be worried about?
It is a cliché, but complacency is probably the risk that is both obvious but also very difficult to manage. It is important to stay balanced, rebalance portfolios, and not change the goal posts, which is easier said than done. Imagine the worst case scenario for the assets that you manage – and do what it takes to avoid that outcome. Frequently that means going against the crowd – hence the difficulty.
5. Private Capital Today. Covid tested private capital’s benefits (e.g. yields, protection, non-correlation) and so far so good. Where are we today in the evolution of that asset class?
I think that there are some structural elements to private capital that may seem like constraints, but which can actually provide long-term benefits to client portfolios. Behavioral biases make it difficult for most investors to make the right long-term decisions under pressure. In many cases, “do nothing” is the correct long-term approach. However, when you have too many levers to pull, it’s easy to mistake action for results. Private capital solves for some of that. But it’s not a panacea. Ultimately assets can take real (not just mark to market) losses independent of the wrapper if a crisis is severe enough. So it’s still important to keep in mind portfolio construction, balance and avoid complacency. Having said that, we’ve seen nothing short of amazing growth in the private asset classes – growth and yield oriented – with very real impact for investor portfolios. As technology, legal structures, and regulation evolves, I see it as inevitable that at some point the “public”/”private” divide will look more like a continuum, with each portfolio finding the right mix of the two based on the underlying goals and objectives.