Trends Watch: February 23, 2017

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Charles Spero, Managing Partner at Crescent Sky Capital.

What is your outlook for the economy and the market?

Overall the U.S. economy strengthened in 2016 and we expect this trend will continue in 2017. At Crescent Sky, we believe that the consumer is at the core of the nation’s economic strength and at this time there are many factors that point towards continued consumer strength. The employment picture is solid with the unemployment rate at 4.8% for January while wages and real disposable income remained stable. Consumer confidence remains strong and is currently near all-time highs. Although no longer at the peak, consumer tailwinds remain due to a strong dollar, relatively low energy prices and housing affordability remaining at better levels than those present during the 1990s through mid-2000s. 

In addition, prospective government policies aimed at lowering tax rates and reducing regulatory burdens have the potential to drive more economic activity, buoying an already healthy employment market and strengthening the economy. In fact, if policy/government driven stimulus leads to a consistently high level of employment, consumers should benefit as it translates into more disposable income and confidence.

Although we maintain a positive outlook for the economy, we do have greater concerns about market performance given investors’ expectations and current valuations in the equity markets and the historically low level of yields. 

What do you expect to see in the alternative investment industry in 2017?

2017 will continue to be a year of evolution for the alternative investment industry.  Investors will look to compare the value propositions put forth by the industry against the growing list of passive instruments that are more widely available today. It is likely that many allocators will opt for a strategy of indexing parts of their portfolio while looking to the alternative investment industry for specific strategies that will be successful in the current economic environment. The divergence of sector performance and the need for alternative fixed-income products in a world of rising yet historically low yields may drive allocators to look towards the alternative space for answers.

Some trends that we expect to see in the upcoming year include more movement towards tiered fees based on size of allocations, continued demand for strategies with lower correlation to benchmarks and investors preferring to allocate to managers that have specific targeted strategies combined with a strong level of expertise.

How do you look at investing in fixed-income markets today? What strategies do you like?

Investing in today’s fixed income markets presents both challenges and opportunities. The challenges mostly come in the form of duration. This is evident when reviewing the events of this past November, when 10-Year U.S. Treasury yields saw their biggest jump since November 2009, rising 56 basis points in yield and dropping almost 5% in price for the month.  At Crescent Sky, we have held concerns about the risk/reward proposition of the rates market as the regime of negative yields spread across Europe, and we still believe that strategies emphasizing shorter duration credit assets will outperform during this part of the cycle.

Although an improving economy and stronger labor markets will likely lead to interest rate hikes by the Federal Reserve and higher U.S. treasury rates, at Crescent Sky we believe that these conditions present opportunities in the consumer and corporate credit markets.  A stronger labor market should create conditions where borrowers are more willing and able to service their debt.  We’ve already seen spreads tighten for corporate credit and we believe the ultimate beneficiary of a strong economy will be the average American worker. Given these views, we believe our consumer loan strategy, which invests in short duration high yielding consumer loans selected by our data driven credit algorithm, is well positioned to deliver solid performance in today’s market.