The Paper Trail: Shifting Sands

Happy Halloween! This year, the Huber clan will be trick-or-treating as an assortment of sea creatures. (Yours truly will be going as an octopus 🐙)

And in case you were wondering, Snickers and Reese's will forever reign supreme in our house. 

I hit the podcast circuit pretty hard in October, appearing on three different shows. 

First up, I was a guest on on Morningstar's "Big Picture in Practice" podcast, covering all things alternatives, private markets, and interval funds.

I was also interviewed by my friend Samir Kaji, Founder and CEO of Allocate, on the aptly named Allocate podcast. In this episode, we discussed:

• My inspiration behind writing 'The Allocator’s Edge'
• Why the relationship between stocks and bonds is not static
• The rising number of accredited investors and the implications for private market access
• Evergreen funds and the importance of liquidity management
• Generational shifts in attitudes towards alternative investments
• How secondary markets are unlocking liquidity in private equity
• Strategies for advisors to introduce alternatives to their clients
• Best practices for integrating alternatives into a balanced portfolio

And last but not least, Jeremy Schwartz, Global Chief Investment Officer for WisdomTree, had me on his show Behind the Markets. This marked my third time appearing on BTM and I had fun catching up with Jeremy sharing what I've been up to since joining Cliffwater this year!

Now, please enjoy this 🎃 spook-tacular 👻 October 2024 edition of The Paper Trail! This month's research roundup features:

• Evergreen funds vs. drawdown funds
• Thoughts on asset allocation
• Negative sentiment in clean energy stocks
• Infrastructure's performance during the inflation storm
• Risk Parity
• Alternative risk premia strategies
• The perils of partisan investing
• American stock market exceptionalism 
• Private credit's next era
• Endowment model evolution
• And much more!

Can evergreen private markets funds deliver similar returns to traditional drawdown funds?

"Ultimately, the decision as to which structure is appropriate for a given investor is a matter of individual circumstances and preferences. We believe a key factor influencing this analysis is the enhanced compounding effect an investor sees in the evergreen funds during the initial years of the investment."

Comparing Evergreen and Traditional Fund Returns (Neuberger Berman)

Do we unnecessarily overcomplicate the asset allocation process?

"This isn’t a difference in degree; it’s a difference in kind. Ownership assets (things like common stocks, whole companies, real estate, private equity, and real assets) and debt (bonds, loans, mortgage backed securities, and other streams of promised payments) should be thought of as entirely different, not variations on a theme. They have different characteristics and potential, and the choice between them is one of the most basic things investors must decide."

Ruminating on Asset Allocation (Oaktree)

Why is there such negative sentiment in the clean energy sector?

"The history of clean energy is littered with booms and busts, but we don’t think that its prospects are particularly risky at this point. Costs have come down, policy support continues to strengthen, and the industries are maturing."

Misguided Mayhem (GMO)

Has infrastructure earned its reputation an an inflation-resilient asset class?

"Infrastructure has largely lived up to its billing and made it through the recent inflation spike unscathed and in some cases stronger."

Did infrastructure weather the inflation storm? (StepStone)

What are the return patterns for bonds under different economic and interest rate scenarios?

"After interest rates peak, there tends to be a period of stable returns before the beginning of the next leg of the interest rate cycle. During this period, economic activity is often decelerating which leads to greater investor concerns about the ability of borrowers to pay. To avoid default and drawdown risks, many investors will rotate into higher-quality bonds and away from lower-quality bonds."

How fixed income portfolios are affected by interest rate regimes (Verus)

Is risk parity more than just levered bonds?

"We have argued that levered bonds are necessary to give sufficient exposure to bonds in risk-parity and multi-asset portfolios. The unwanted effect of this, during bond sell-offs, may be mitigated through risk management techniques."

Bond Appétit: A Marmite Conundrum (Man Group)

Are investors aware of the potentially hidden factor exposures in their alternative risk premia strategies?

"A risk-neutral portfolio construction approach can significantly reduce the unintended bets taken by a dollar-neutral approach and maximize the diversification benefits of alternative risk premia strategies."

The Shifting Sands of Alternative Risk Premia Strategies (Research Affiliates)

Is there a relationship between corporate partisan bias and stock returns?

"Nonpartisan stocks appear to offer the dual benefit of higher return and lower risk. To be clear, these companies are not “apolitical,” abstaining from the political process. On the contrary, they are highly proactive in ensuring they have “a seat at the table.” That said, they do not let partisan politics get in the way of their business objectives."

Partisan Investing (Sparkline Capital)

Is American stock market exceptionalism sustainable?

"It is typical, following a period of outperformance, for investors to chase the winners and extrapolate past success. The fact that US companies delivered superior earnings and price performance over the past decade (which was most pronounced in tech) got priced in via these higher long-term cash flow expectations. This dynamic is what sets a higher hurdle for outperformance looking ahead."

US Exceptionalism: Drivers of Equity Outperformance and What's Needed for a Repeat (Bridgewater Associates)

How large is the addressable market for private credit?

"Private credit’s growth to date has been largely concentrated in direct lending, a strategy fueled by the twin tailwinds of banks’ retrenchment from leveraged lending and private equity’s (PE) rapid expansion. But amid the higher rate and slower PE deal environment, the asset class has begun to expand into new areas, including a wide variety of asset-based financing structures."

The next era of private credit (McKinsey & Company)

What factors have driven the "size premium" in private equity markets?

"Smaller companies in the lower middle market often have a greater capacity to increase operational scale than larger companies. The ability to grow revenue and EBITDA significantly in these small buyout transactions can be a significant driver of returns in these deals."

The Case for Small Buyouts Part II: Observed Drivers of Returns in the Lower Middle Market (RCP Advisors)

Does the endowment investing model need to evolve?

"By taking a dynamic approach to the overall portfolio, rethinking diversification in liquid and semi-liquid assets, selectively embracing active management where it is most beneficial, and opportunistically investing in illiquid assets, we believe that E&Fs can meet the challenges confronting them today, and in the years ahead."

Meeting the challenge of the new regime in endowment portfolios (BlackRock)