The Paper Trail: Widening the Lens

April was a doozy! While it may not feel like it, we just lived through possibly the largest intra-month comeback of all time for stocks. At one point, the S&P 500 was down 11% in April. Now, barring a massive move up or down in this final trading day of the month, equity markets globally are poised to finish roughly flat. 

Without any great insight into whether the next leg is higher or lower, it seems this correction came and went as fast as the Grampa Simpson meme. 

This month reinforced the notion that sometimes the best action is inaction. Knee-jerk reactions in the face of extreme uncertainty and volatility are unlikely to work in our favor. Strategic asset allocation, thoughtful diversification, and rules-based investing are the best antidote to our worst impulses. Moving to cash or dramatically altering your portfolio at the wrong time may leave you yelling at clouds...

Regardless of where things go from here, one thing is for certain: the past month has given us stories to tell our grandchildren for decades to come. 

Now, please enjoy the April 2025 edition of The Paper Trail. This month's research roundup features:

• The case for international stocks
• A historical analysis of tariffs
• Stagflation and portfolio defense
• Cold storage real estate 
• Infrastructure secondaries
• Capital solutions as an asset class
• Long-run return expectations
• Patience and trend-following strategies
• Reimagining the endowment model
• Public and private equity valuations
• Avoiding value traps in small cap stocks
• European private capital opportunities

Has the case for international stocks strengthened in recent months?

"Even with recent gains, many top-performing non-U.S. stocks trade at a discount to U.S. peers. Some valuation gap may be warranted given faster economic growth in the U.S. and the potential earnings and productivity advantages of AI. But the premium/discount appears to reflect a market that prioritizes geography over fundamentals, even those that are positive."

Widening the Lens: Revisiting the Case for Non-U.S. Stocks (Janus Henderson)

Why is the Tariff Tantrum causing so much stock market volatility?

"The primary driver of equity market volatility is the level of disagreement and uncertainty about future cash flows."

A Historical Analysis of Tariffs (Verdad)

Is stagflation on the horizon?

"Generally speaking, stagflation could prove troublesome for traditional portfolio anchors — fixed income and equities — but alternative asset classes and even pockets of traditional asset classes can help shield portfolios from the adverse impacts of low growth coupled with higher rates and inflation. And like any other market dynamic, stagflation would only be temporary before a more “normal” market returns. Again, we stress that stagflation is not a consensus outlook but given the recent tariff announcements and trending economic data, it is not out of the question."

Bracing for Stagflation (Marquette Associates)

Is cold storage an attractive segment within the commercial real estate market?

"The emerging demand trends for cold storage discussed above will put a premium on space that is newly built. About 75% of all cold storage facilities in the U.S. are more than 25 years old (Exhibit 5), making the sector ripe for consolidation, modernization and new investment."

Cold Storage: A Niche Property Heating Up (MetLife Investment Management)

What factors are driving growth in the secondary market for private infrastructure assets?

"Even under conservative assumptions, we estimate the infrastructure secondary market will grow significantly in the near- to medium-term. Buoyed by a maturing primary market, a growing desire for GPs (and their LPs) to hold on to marquee assets and growing acceptance of secondaries’ role in portfolio construction, the infrastructure secondary space may one day grow to be as large as real estate or private equity."

The Fundamentals of Infrastructure Secondaries (StepStone)

What is "capital solutions" investing and why is it relevant in private markets today?

"The current environment presents a confluence of factors
making Capital Solutions a compelling opportunity, poised to redefine the financial ecosystem through an integrated debt/equity solution. The departure from zero interest-rate policy made many debt financing sources expensive, increasing the value of flexibility, including non-contractual forms of return. The ability to creatively structure a diverse suite of securities that are well aligned with the equity, while also being downside protected, is distinctive and in high demand. In other words, many businesses are seeking new ways to obtain additional capital for acquisitions or strategic investments while also minimizing cash-pay debt service. This has contributed to more demand around cross-asset financings such as preferred or convertible preferred equity, structured equity, or HoldCo financings."

Reinventing Corporate Capital (KKR)

How do investors arrive at both objective and subjective expected returns?

"The contrast between objective and subjective return expectations is arguably a distinction between normative and descriptive expectations. In the spirit of Kahneman’s (2011) fast versus slow thinking, past performance comes easily to mind, while required discount rates need more effortful thinking. Objective expected returns are often rational and anchored to forward-looking market yields (more visible for bonds than stocks), while actual subjective expectations can be irrational and driven by a rearview-mirror mindset."

How Do Investors Form Long-Run Return Expectations? (AQR)

How do trend following strategies typically perform during sudden market dislocations?

"The critical distinction lies in the nature of the selloff, and whether it is a correction or a crisis. As seen in Figure 2, trend strategies have historically delivered robust performance during sustained market drawdowns. However, their behaviour during compressed, highly volatile episodes more closely resembles a roll of the dice – heavily dependent on positioning at the moment volatility erupts."

Why Patience Matters During Market Stress (Man Group)

Is it time to reimagine the endowment model?

"We think a reimagined endowment model can embrace both the old art and the new science. Maximizing estimated returns with meaningful equity and illiquid allocations should be combined with rigorous risk management to prevent unwitting factor concentrations or dilutions, unnecessary fees, and the opportunity costs associated with unexpected liquidity crunches. Leading-edge tools can support a more holistic and reflexive portfolio construction framework, which can help identify and adapt to shifting investment regimes."

The Endowment Model Reimagined (Neuberger Berman)

Should investors expect public and private equity valuations to converge over time?

"To some extent, the disparities in valuations between public and private market companies can largely be attributed to differences in industry and sector compositions. The major sectors, for the most part, exhibit similar valuations for both private and public markets. Notably, the information technology sector has been a significant driving force behind higher valuations in both markets."

Converging Paths or Persistent Gaps? Understanding Valuations Across Public and Private Equity (Meketa)

Do current valuations point towards future outperformance for small caps?

"Today's historically wide valuation discount between small-cap stocks and large-cap—a disparity amplified by the dominance of the "Magnificent 7"—presents a compelling opportunity for small-cap investing. Yet investors remain wary of embracing this exposure. By employing a smarter approach to small-cap investing that emphasizes valuation while avoiding value traps and falling knives, investors can more confidently position their portfolios to capture this opportunity."

Small Caps, Big Opportunities: Investing Beyond Large-Cap Stocks (Research Affiliates)

Is Europe an attractive destination for private capital?

"Despite weaker public equity market returns and GDP growth since 2000, European private equity returns have outperformed U.S. PE returns during the same period. We believe this is a function of Europe’s relative private capital scarcity."

Europe: Opportunity in Fragmentation (DavidsonKempner)