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2021 Outlook – Wealth Advisors Seek Uncorrelated and Income Producing Strategies

calendar_today January 14, 2021

Conshohocken, PA, January 14, 2021 – 2020 presented unprecedented price movements and dramatic volatility in the financial markets. Seeing equity markets set all-time highs while the world was in the middle of a pandemic was surreal.  With the influence of further stimulus and record low interest rates, market valuations seem to be at fair value, but we expect to continue to see heightened volatility levels as the economy digests the ramifications of the ongoing impact of the pandemic. Wealth advisors are coming to PPB looking for alternative investment strategies to accomplish two goals – uncorrelated return streams and income.  

With rates near zero, the need for income remains a key challenge for wealth advisors and alternative investments have helped solve many of these income gaps.  According to Preqin, private debt AUM is expected to grow more than 11% annually over the next five-years¹ as allocators increase their positions to generate higher yields than traditional bonds can provide.  

Within private credit, direct lending and asset backed lending strategies remain popular and represent a way to achieve higher returns and better yields.  With continued bankruptcies in 2020 stemming from the pandemic, PPB has continued to emphasize the advantages that larger credit managers have versus smaller, more boutique private credit specialists.  Many of these smaller firms came into existence over the past five-years are now taxed with managing disruption within their current portfolio companies.  As such, they are at a competitive disadvantage compared to their larger peers who have dedicated teams in place strictly focused on sourcing deals and not on asset management.  In addition, the larger firms have dedicated specialist teams in place to take advantage of the increased litigation finance and real estate credit opportunities present in this environment.  Other areas of interest within the credit markets include royalty strategies in life sciences or music and film in addition to sports finance. 

Beyond private credit, another area that has continued to flourish during the pandemic is multifamily housing, especially with garden style apartments in more suburban settings.  While the newer Class A properties have been under some pressure, the occupancy rates with Class B properties are near all-time highs.  As widespread work from home initiatives were implemented in 2020, many younger renters have left pricier apartments in NYC and San Francisco and moved to cheaper units outside of the city limits.  For this reason, valuations have increased in multifamily workforce housing. A significant lack of supply in garden style apartments remains as most new real estate development has focused on more upscale projects with pricier rental rates.  Garden style properties are able to generate stable, high single digit, annual yields for investors with additional upside appreciation. PPB remains bullish on the space as an attractive income producing tool for allocators. 

We’ve also discussed the benefits of reinsurance in the past and our fund manager partner has proven our thesis by delivering solid, high single digit, returns in each of the past few years without any stock or bond market correlation.  Of particular note was how well they performed during not only the widespread market dislocation this past March, but also through a hurricane season that saw a record number of named storms in 2020.  Our reinsurance strategy finished 2020 with a positive return in each month of the year.  PPB believes reinsurance is an excellent portfolio diversifier and one of the few strategies that is truly uncorrelated to the broader financial markets.  With volatility expected to remain elevated and market valuations once again setting highs, it remains an excellent time to add or bolster an allocation to reinsurance in client portfolios.

Finally, with such a focus on income and uncorrelated return streams, we want to highlight some other complementary strategies.  The pandemic saw an explosion in the NASDAQ as the index returned nearly 44% in 2020.  As such, many of the fundamental catalysts of NASDAQ’s return remain in the early innings.  We continue to be bullish on technology and life sciences and the corresponding methods to access those companies before they publicly list through venture capital and growth equity funds.  The universe of public offerings continues to shrink as companies stay private longer, enhancing our belief that an allocation to venture and growth equity is another prudent portfolio diversifier.        

As we sort through a changing political landscape and the on-going pandemic, alternative investments can play a key role in client portfolios.  As we start off 2021, we are especially excited about the opportunities in private credit, garden style multifamily housing, reinsurance and venture capital.  These strategies are well positioned in this environment and they can provide income solutions and fundamental portfolio diversification benefits regardless of the broader macro or market cycles.       

For more information on how to access PPB’s platform, please contact Frank Burke, CFA, CAIA, Chief Investment Officer, PPB Capital Partners, 484.278.4017 Ext. 108 or at fab@ppbadvisors.com.

Important Footnotes

^1. Source: Preqin.  2020 figure is annualized based on data to October. 2021-2025 are Preqin’s forecasted figures.