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2020…Forging ahead through the Fog

Income based investing has been one of the biggest drivers of PPB’s growth over the past five years.  Given where rates are (and have been over the past 10 years) investors have been starved for yield.  Private strategies offer compelling yield-oriented investments in health care, music/film and energy royalties, asset-based lending, real estate and CLOs.

Royalty strategies allow for an income stream to be paid out with little correlation to the public markets.  We are seeing these strategies paying quarterly dividends at annualized rates of a least 8% and in many cases, significantly higher.  Within private real estate, despite the compressed cap rates, spreads over treasuries remain attractive compared to historical levels.  In addition, during the early years of these investments, most of the income component will be tax-free, due to the depreciation benefits of investing in real estate.  On the flip side, in such a low rate environment, borrowing costs remain at historic lows, allowing for better leverage adjusted returns.  Overall, we are concerned with the deteriorating lending standards within the corporate credit markets, and we are therefore more focused on asset-backed strategies with strong covenants.

We came across this piece from Fidelity that tries to offer ideas for investors need for income in 2020.  While the strategies indicated by Fidelity (in this recent article on “Where to seek income in 2020“) offer advantages in the public markets (high dividend stocks and convertible bonds), investors are still subject to strong market correlations at a time where equities are at all-time highs.

We concur with Fidelity’s concerns regarding the valuations of public REITs but we continue to find compelling opportunities in private real estate, especially in workforce housing and grocery-anchored real estate.  Our client firms have utilized PPB to include these private strategies for their clients’ portfolios at significantly lower minimums and without exorbitant fees for access.

For more information on any of these resources or concentration areas, please contact me.

Frank Burke, CFA, CAIA
Chief Investment Strategist, PPB Capital Partners
484.278.4017 Ext. 108