Investment strategies for maneuvering rate cuts

Investment strategies for maneuvering rate cuts

By Paul Iacovacci, Chairman of The Board at The Beryl Consulting Group 

Investing for high returns has presented a conundrum over the past year considering the volatility in stocks, bonds and other capital growth strategies. In the current environment with interest rates low and credit spreads tight, investors in order to capture their targeted returns have been extending out on the duration and on the credit curves.

As an investor I want to avoid undue risk and yet achieve consistently high returns whatever direction the market may turn, up, down or sideways.  The mixture of fundamental economic news and political posturing have caused wide gyrations in the markets over the last year.

Low interest rates continue to fuel the equity markets with no change in sight. All of this activity is occurring against a backdrop of political uncertainty, namely the headwinds of the US global trade wars with China, Canada, Mexico and the European Union.

Considering all of these factors, finding steady returns and continued acceleration in the public stock market becomes questionable.

What to Buy Now

Thinking differently and having an out-of-the box mindset is the best approach to this market environment. Markets are at or near the top of a long economic cycle, and while it is impossible to predict exactly how long a given cycle will last, I want my investments to be insulated and yet still have robust returns. Additionally, there is not much alpha to be found when investors seek to park their capital all in the same investments whether strategies, hedge funds and private equity names. Finding opportunities that are under the radar will have distinct advantages.

Along this line of thinking, my focus presently is on noncorrelated absolute return strategies, where steady returns can be achieved irrespective to what the economy and the public markets are doing. Taking this approach—turning away from traded assets—is what can separate great fund managers from successful ones who may be ‘running with the pack.

The more interesting opportunities I see today is in certain direct lending and unique fixed asset strategies. Excellent examples include fine wine, sports memorabilia, gemstones, diamonds, artwork, Intellectual Property (IP), and litigation funding.

These assets not only can often return 10%+ annually when chosen carefully, but they have staying power and are not as sensitive to public market volatility. These assets have rarity value, so they have their own market dynamics which on average insulates them from large market swings and downward movement. As downside protection, every investor should have a portion of their portfolio invested in these types of assets. These strategies should be viewed as insurance against the rest of an investor’s portfolio which have beta to the economy and the public markets.  As the main portfolio can be experiencing negative returns these strategies should cushion the portfolio with positive returns.  The question maybe asked, can these strategies be affected by violent market disruptions, possibly initially as some holders may need to liquidate but this should be viewed as a buying opportunity. 

What to Sell

Given where we are in the economic cycle, I recommend holding debt at the senior level of a corporate capital structure and selling my positions lower cap structure positions. I would also move my duration shorter probably staying within a 3-year duration.  I would also move out of less liquid public markets, into the investment options provided above. 

 

Paul Iacovacci’s Biography:

Paul Iacovacci is an investment and business strategist as well as entrepreneur with a career spanning 35 years. His expertise in global fixed income strategies includes public securities, private loans, emerging markets and alternative strategies.  

Iacovacci began his investment career in 1984, first with Salomon Brothers and then at Merrill Lynch, working in illiquid fixed income credits. He then turned his attention east and started the Asian business for Oppenheimer and then at Bear Stearns.  Most recently, Iacovacci served as co-founder, partner and investment committee member of Brevet Capital (New York) where he focused on secured loans to emerging growth companies. 

 

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