The changing portfolio mix in a negative real yield world
Global Investment Insights
with Joe Kalish, Chief Global Macro Strategist, Ned Davis Research (NDR)
Joe is the Chief Global Macro Strategist at Ned Davis Research (NDR), responsible for all of the firm’s bond and economic analysis. In this capacity, the main area of focus for Joe currently is assessing the risks in fixed income markets emanating from the global economic recovery and the health risks associated with the pandemic. This includes changes in bond yields and central banks’ monetary policy settings and how that impacts regional and sector allocation within fixed income.
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Given the negative real yields throughout the developed world, fixed income will not provide the kind of returns investors have experienced in recent years.
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Joe elaborated further, “I am also focused on bond yield movements and the related effects of rising yields on other asset classes, including equities, the US dollar, housing, gold, commodities and Bitcoin.
I have been dedicating quite a bit of time rethinking strategic asset allocation, given the historically low bond yields. In the process, I have undertaken analysis comparing various blends and compared those to a standard 60/40 benchmark, by combining different combinations of bonds and alternative investments, including REITs, commodities and gold in my analysis. Given our risk and return assumptions, we found reducing exposure to fixed income from 40% to 20%, and reallocating half the balance to commodities, with smaller amounts to REITs, gold, and crypto would bring you closer to attaining required return objectives, with a marginal increase in overall risk.”
In the environment we are in, the biggest challenge for both asset owners and asset managers will be achieving return objectives, without taking on inordinate amount of risk, in Joe’s opinion.
“Given the low or negative level of nominal yields and negative real yields throughout the developed world, fixed income will not provide the kind of returns investors have experienced in recent years. Additionally, bonds may not provide the same degree of hedging protection against negative equity outcomes. So, investors will need to reduce their allocations to fixed income and cash.
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Bonds may not provide the same degree of hedging protection against negative equity outcomes.
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Investors will need to consider greater exposure to a broader array of asset classes and instruments, including private credit, private equity, venture capital, housing, commodities, gold, and crypto. Investors will need to consider a well-diversified portfolio of risk assets to improve the likelihood of meeting their return objectives”, Joe explained.
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Investors will need to reduce their allocations to fixed income and cash.
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This said, Joe sees greatest opportunities to deploy capital into digital assets over the medium term (on three-year forward-looking horizon), albeit with most risk associated with it also. “We are seeing increased institutional adoption and small allocations, which could grow over time. Some investors see it as a store of value and protection against fiat currencies. Some corporations are using it as part of their cash management. What could really propel it are increasing use cases.
I also like industrial commodities, as demand increases for green energy and electric vehicles, while investment has been lacking.
I would not discount equities, considering the dearth of alternatives in a global rebound.
Geographically, I still like the investment outlook for the US, which has powerful monetary and fiscal support and a faster vaccine rollout. Those could help the US recover more quickly than other regions. This said, Asia will continue to grow and should do well also”, Joe remarked.
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Investors will need to consider greater exposure to a broader array of asset classes, including private credit, private equity, venture capital, housing, commodities, gold, and crypto.
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Innovation is moving so quickly, it is impossible not to be optimistic about the future, Joe proclaimed.
He elaborated further, “there are three areas that excite me the most. The first is digital assets, digital currencies, and real-time payments. This includes not only cryptocurrencies, but how central bank digital currencies will fit into the mix. Either way, the cost of processing financial transactions is going to plummet.
Second, ESG is still in its infancy. More and more money continues to be allocated to ESG products. It is especially popular with the millennial generation. The industry has made good progress on the E (environmental) side, but there is more work to be done with respect to the S (social) and G (governance) portion of ESG. I am particularly interested in renewable energy and energy storage themes.
Advancements in healthcare treatment is the third area that looks promising. We have to marvel at how fast and effective COVID-19 vaccines were developed. But there are other areas, such as immunotherapy and microbiome-related therapies that look interesting also.”
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ESG is still in its infancy. More and more money continues to be allocated to ESG products.
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Joe left us with some personal reflections on the path that led him to the role he currently finds himself in, which may serve as practical advice to others.
“When I was in graduate business school, I conducted several ‘informational interviews’ with both alumni and members of a professional society. Since these were not job interviews, they were very receptive to giving advice. What I found interesting is that everyone said they had an unusual path to get to where they were. Nobody had done what they were recommending — a combination of computers and finance, which is what I had done.
The late Fred Dickson recommended that I just get my foot in the door somewhere. Go anywhere when you are first starting out.
When I got an offer from Ned Davis Research, I ran it by Fred, and he had nothing but nice things to say about Ned. Fred said Ned would be a good mentor and that I would learn a lot. That was certainly true.
But I also enjoy what I do, and too many people do not like their jobs. So personal happiness and satisfaction are important, as this is not an easy business”, Joe concluded.
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