Andy Martin is portfolio manager of the 7Twelve Balanced Portfolio, president of 7Twelve Advisors, LLC, and author of Dollarlogic: A Six-Day Plan to Achieving Higher Investment Returns by Conquering Risk. Andy partners with Prof. Craig Israelsen and has contributed to A4A in the past. He recently attended Financial Advisor Magazine's conference on alternative investments and sent in this post.
Ali Motamed (Boston Partners), Ben Hunt (Salient Partners), Jack Rivkin, (Altegris), Evan Siminoff (Financial Advisor)
By Andy Martin
What do Greece, China, the Euro, massive world debt, and the US stock market all have in common? They’re all better with alternative investments.
That was the message at the 6th Annual ‘Inside Alternatives’ conference sponsored by Financial Advisor and Private Wealth in Denver July 13-14.
“Greece is a game of chicken,” said Ben Hunt, Ph.D., Chief Risk Officer of Salient Partners. “The game of chicken is not a test of capabilities, but a test of will. And it is going to spread beyond Greece, perhaps to Russia, the US and elsewhere.”
Hunt’s wariness was not reserved for Greece. “We have much more debt than we had in 2008,” said Hunt. “What we are seeing today is unlike anything we have seen. We really have to go back to the 1870s and 1930s to understand it.”
Dr. Hunt was not alone among panelists at the conference declaring the world has gone wrong. His co-panelists were similarly foreboding.
Ali Motamed, portfolio manager at Boston Partners criticized a lack of long-term vision. “We are short-sighted; we are running while looking at our feet,” he said. Instead we should be “opportunistic and look at the long-term horizon.”
Motamed reasoned, maybe there is some justification for short-sightedness. “A 1% increase in rates would raise borrowing costs 15%-18%, which takes out M&A activity, share re-purchases, and other corporate financing,” he said. “Right now is the time to be conservative.” That’s an unexpected message from a manager of alternative investments.
Secular Low-Growth Ahead
A consistent theme running through the conference was the notion that we are in a secular low-growth environment and the only way out is alternatives. “We are in a new game, a global slow-growth period for the next five to ten years,” said Altegris CIO Jack Rivkin. The new game, Rivkin said, may include a major country failing financially. Raising the spectre of 2008, Rivkin asked advisors: “If Greece is Bear Stearns, who is going to be Lehman?”
A second theme was “divergence.” Divergent markets, public policy, and strategies, which lead inexorably to the solution, or as Hunt offered, “Divergence leads to opportunities in alternative strategies.”
Alternative to what? Heretofore we have lived exclusively in a stock and bond world. That is the common perception. However, as John Cadigan of Behringer Securities, pointed out, the first long/short strategy was created in 1949, which pre-dates Markowitz’s Modern Portfolio Theory. Even so, the dominant investment choices available to most investors remain stocks, bonds, and cash. McKinsey & Company
estimates $7.2 trillion was invested alternative investments in 2013, only 10.7% of all managed assets. However, alternatives grew at twice the rate of traditional investments from 2005 to 2013.
What’s An Alternative Investment?
Alts can be asset classes such as real estate, commodities, or other derivatives. They can be strategies like long/short, real return, hedged, leveraged ETFs, or volatility proxies. Or they can be investment vehicles like private equity, P2P loans, bitcoins, non-traded REITs, structured notes, leveraged loans, or limited partnerships. You get 31 flavors quickly because there are scores of items that could be added to the list.
Ryan Tagal (Envestnet), John Cadigan (Behringer Securities), Jason Cross (Whitebox Mutual Funds), Bo Brustkern (NSR Invest), Bill Miller (Brinker Capital)
Rejecting Modern Portfolio Theory
The audience heard from Envestnet, Behringer Securities, Whitebox Mutual Funds, NSR Invest, Brinker Capital, and some forty other asset managers.
Whitebox Mutual Funds Head of Equity, Jason Cross, Ph.D., kicked off with a controversial statement echoed by many other panelists. “We reject MPT (Modern Portfolio Theory), and that the only way to get higher returns is through adding risk,” said Cross.
Behringer Securities’ national sales head, John Cadigan, doubled down on Dr. Cross’s comment with, “If you are allocated to the 60/40 model (60% US stocks, 40% US bonds), you are whistling by the graveyard,” he said.
More Miller, Please
Brinker Capital CIO Bill Miller, meanwhile, alerted advisors that alternatives are not sure to add diversification to a portfolio, since “REITs can either act as stocks or real estate.” The conference could have used more refreshing comments like Bill Miller’s.
John Mauldin called traditional asset managers, “prison guards of the past,” for example. There was no voice of reason to interject that Wellington Management, inventor of the 60/40 model, which was derided repeatedly by speakers at the conference, has outperformed the original S&P 500 fund since inception and done so with less risk.
Attendees Leon Neumann, treasurer at The Navigators, an international, interdenominational Christian ministry, put it this way: “We need to evaluate what they’re saying versus what they’re selling.” To be clear, sessions were educational but often the marketing spin was driving key parts of the messages panelists delivered.
Some Good Alts Ideas For Advisors
Despite the unbalanced perspective of the sessions, advisors attending the conference undoubtedly found some good alternative investment ideas. For example, a novel way to harvest fixed-income returns without the overt pricing risk that bond investors face was advanced by Bo Brustkern, co-founder and CEO of Denver, Colorado-based, NSR Invest. Brustkern’s firm helps financial advisors intelligently access peer-to-peer loans for clients. Investors become banks of sorts, rather than potential victims of bond-price weakness. This strategy would offer low correlation to aggregate bond markets.
Beleaguered World Economy
A major theme of the conference was that the US is in a long-term low-growth environment. “We are capable of growing at 4% to 5% for long periods of time,” said Larry Kudlow, author and CNBC senior contributor.
Greece’s Existential Question
As sure as all proverbial roads lead back to Greece, Kudlow said capitalism could cure it. “In the last 30 years, with the rise of capitalism around the world, one billion people have risen from one dollar a day of earnings to the middle-class,” said Kudlow, former chief economist at Bear Stearns. “They are not gaining ground because of government policies, but because of economic freedom.”
Then Kudlow unloaded: “Greece owns the means of production — Greece is a Socialist country,” he said, sarcastically asking. “How’s that working for you?”
Kudlow’s solution is not more debt, as European creditors recently approved. Instead Greece should “sell off all of its state-owned business,” Kudlow said. The crowd roared with applause.
Kudlow concluded with a reminder: “The stock market is, in effect, the chronicler of wealth and economic freedom.”
Most of those present at the conference believed alternative investments would be a potent tool in managing portfolios. At times, however, speakers at the conference acted like they were revealing secrets new for investment success, and I was a little uncomfortable that some advisors attending might learn the secret handshake without and overstate the benefits of membership in the alternatives club. But apart from the lack of a strong voice of reason and a balanced perspective at the sessions, numerous speakers offered valuable ideas. Nothing in this article, however, should be construed as investment advice or a recommendation of any particular investment product.
(Andy Martin is a securities registered principal. Securities and investment advisory services offered through Girard Securities, Inc., member FINRA, SIPC.)
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