When Kings Shift Gears: Daniel Kalenov

Daniel Kalenov

Description

I'm not allergic to paper assets. To my mind there is nothing inherently evil about them - they serve a purpose, and when bought at the right price for the long term can provide very decent (even excellent) returns on investment. Ask Warren Buffet.

Informations

• Publié par: globaldiversified
• Publié le: 14 novembre 2016
• Nombre de lectures: 2
• Langue: English

Extrait

When Kings Shift Gears: Daniel Kalenov I'm not allergic to paper assets. To my mind there is nothing inherently evil about them - they serve a purpose, and when bought at the right price for the long term can provide verydecent (even excellent) returns on investment. Ask Warren Buffet. The rub, of course, is buying them at the right price. This has become incredibly difficult in recentyears as the aftershock ofpost 2008quantitative easingand near zero interest ratepolicies has seeped into equityand bond markets, inflatingprices to levels that if not unsustainable are certainly unattractive. Bill Gross, known as the "Bond Kingmana" and former ger of the PIMCO total return bond fund, the larghas voiced his oest of its kind in the world, pinion on the matter following a recent solid consumer spending report: “Individual investors have little choice but look at real estate and gold given current bondyields, he said. “Bonds are not an asset, they’re a liabilityin a negative interest rate environment. Whywould someone want to own them?” The immediate thought is that it does notbode well when the guy who’smanaged more moneythe bond market than an in yone alivepublicly asserts that he thinks both bond and equitymarkets are overpriced. For those unfamiliar with Gross however, it is worth noting that despite his outstanding longterm record,he’sbeen toutingthat bonds are over-priced consistentlyfor fiveyears now. The adage that "the market can stayirrational longer thanyou can staysolvent"proved accurate, as he was shown the door from PIMCO in 2014 to join the much smaller Janus group. Whether or not Gross is right this time around, the realitythat is ifyou're heavily invested in paper assets, particularly fixed income, you're potentially in a lot of troubleeither way. If he's right (which he will be eventually) then you stand to suffer considerable losses on your capital when the tide goes out. If he's wrongis actuall (which ypossible - Japan has wallowed with sub 1% bondyields for nearly 20 years), then you've actually got an even bigger problem, and it's a problem that could decimate the retirementplanningof an entiregeneration. Specifically, theproblem is that retirementplans are almost universally modeled on an average future compounded return of approximately 7%. Gross, and countless other financial advisors argue that we now live in an age where we can't take that forgranted.

There were nearly$25 trillion dollars in combined US retirement funds as of 2015, with the bulk (over 60%) in equityfunds. The majorityof the remainder is allocated to bond and moneymarket funds, and other conservative options. The issue is that aspeople age it is standardpractice to shift the weighting from majority equities toward a more even allocation with bonds. Although logical at the individual level (capitalpreservation and income takeprecedence over long term returns as we age), this screws everyone collectively when you've got an entire demographic bulge moving in the same direction. Equities begin to slumpas capitalgets sucked awayinto less volatile, "safer" bond funds, while at the same time the money pouring into bonds forces yields down even lower than theyalreadyare. It is difficult to see returns averaging 7% per year in this environment - equities cannot go up forever in the absence of earnings growth, and bond returns to date have been driven by the book value of longer term bonds rising as yields are bid down. These bonds will eventually mature, forcing funds to reinvest the principal at current, much lower market rates. If, as Gross expects, we now live in a world where 4% is the new 7%, the compounding effect makes for an extraordinarygap between the already insufficient levels of retirement savings and what we can expect in the future. A quick calculation tells us that $500,000 compounded at 7% for 20 years becomes $1,934,842. At 4% it becomes a meager $1,095,561 - little over half. These are nominal, non-inflation adjusted figures. Factoring inflation obviously makes things far worse. Gross goes on to specifically suggest, almost surprisingly, that he favors real estate as a haven from this barren wasteland of low yields.It’s surprising becausehas little to he gain from talkingupthe real estate market andplentyto lose via redemptions out of his own Fund bytalkingdown bonds. Wall Street has not been asleepthe real estate idea, and lar to ge, class-Aproperties suitable for large REITs have alreadybeen bid down to absurd caprates as low as 2.5% in some markets. Strip out the REIT's management fee (usuallyand 2%), you're again left with virtually no yield. As smaller investors however, we have an advantage over the bloated institutions that currently subsist on cheap money and have little utility beyond extracting fees and commissions. We are agile. We are not liable to appease our boards. We are not slaves to quarterly earnings reports, and we need not worry about being fired by our superiors (unlike Gross). Smaller investors are able to act independentlyintelli and gently, movingareas of into opportunity and distress that larger actors cannot - or dare not - consider. We can attack smaller opportunities withgreateryields, unconcerned about the need to seek assets and markets that can absorb billions of dollars. In short, against the big boys we may have less moneyindividually, but we can make it work much, much harder.

Ifyour financialplanninghas been based on an assumed 7% average compounded rate, as almost everyone's has, then the cold hard truth is that such returns must now be earned, not collected as a birthright. The market has for 8years stubbornlyto refused provide returns without prodigious quantities of cheap finance to fuel them. Further, the returns on offer are almost entirely driven by capital growth, and achieving actual regular income without sellingca to pture it is near impmoneossible. When y is cheap, the market doesn't care thatyou have it, and won'tpayyou to hold it. Should such forced selling occur en masse, it creates a self reinforcing downward spiral that would ultimatelyvalue to asset restore prices and restoreyields, but not before crushingthe air from retirementportfolios. Catch 22. What the market cares about now is findingnewproductive ways to deploycapital - and highyieldingreal estate is one area where the littleguyhas the upper hand. Real estate investors with specific market expertise are among the few that can reliably generate the returns they have planned for and are relying on. If your portfolio has become bloated with paper and light on real assets (like real estate andgold), be sure to speak withyour financial advisoryteam for some ideas toget back in balance. Daniel Kalenov Daniel Kalenov is the founder and Principal Fund Manager ofGlobal Diversified Partners, LLC. Since 1999, Daniel has analyzed,purchased, repositioned, and managed income-producing real estate assets. GDP was born out of Daniel’s frustration with the volatility of the stock market, and the realization that relying on stocks alone for stability in retirement was largely agame of chance. Contact him at [e-mail] call at 619.500.4235