Trends Watch: October 25, 2018

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 with Michael Ashley Schulman, Consultant, formerly Managing Director/Senior Portfolio Manager, Hollencrest.

What is your outlook for alternatives? 

THE ALTERNATIVES UNIVERSE IS GROWING AND CHANGING.

My outlook for alternatives rests specifically on:

• How alternatives will perform individually as investments; and
• How the scope and range of alternatives will change.

I believe that: A) Risk-adjusted returns in specific alternative strategies will be good until they get overcrowded; and B) Because the alternative landscape is dynamic, alternative managers as well as asset allocators will continuously shift to new opportunities, thus expanding the field. 

The overcrowding of past investments will compel effective chief investment officers to either seek new sources of alpha and uncorrelated returns, or wait patiently for the next fat pitch. 

Over the last decade, we’ve shifted from inexpensive assets in a risky and insipid economic environment to fair and over-priced assets in a seemingly well-grounded global economy, which means that schlocky, leveraged, and lower tier ideas are increasingly peddled. Finding discernible alternative opportunities has become more challenging. 

What is your outlook for the economy? 

THE ECONOMY WILL SEE LOWER GROWTH AND HIGHER MONEY VELOCITY.

As the global increase in LIBOR (short-term borrowing rates) has front run central bank tightening, money supply velocity has increased. The current semi-stable slow growth global economy could keep chugging along for much longer than most people think, meaning that we could be long-cycle rather than late-cycle. The U.S. economy has had a good run since 2009 and the global economy since mid-2012 or early 2016 depending on your marker; although I see deceleration, I don’t see indicators of a recession.  China’s President, Xi Jinping, needs steady growth to reach his five-year goals, and the U.S. President, Donald Trump, needs a good economy if he desires to win the next election; both can be engineered. Nonetheless, one doesn’t need a recession to have stomach-churning price corrections.  

What keeps you up at night? 

MY PRESSING CONCERNS ARE SECULAR.

Beyond the normal concerns of a cybersecurity fiasco freezing an exchange or custodian, a flash crash causing a sizable firm to hiccup, the possibility of a rare humped yield curve, and the next recession catalyst, my largest concerns are long-term secular: i.e., demographics and technology. 

• Will the Eurozone become an anemic post-growth empire like Japan, burdened with an aging demographic and high social costs too?  If this is the case, then a tremendous percentage of international diversification is moot, similar to how the Nikkei sullied diversification for two decades. If the European Central Bank’s equilibrium rate is not increasing above zero, investors have a problem.
• Will Japan’s vehicle, machinery, and electronics industries be the real victims of Chinese growth and One Belt One Road infrastructure? Japanese exporters have the most to lose from Xi Jiping’sMade in China 2025 technology push; but in the West, we think the headline war is between the U.S. and China.  
• What are the best structures to capture emerging market (EM) growth? By 2030, four of the largest seven economies in nominal GDP terms will be EMs and six of the largest eight in purchasing power parity (PPP) terms will be EMs. By 2040, the ten largest emerging economies will be double the size of the ten largest developed economies.

If one is amongst the huge swath of managers that have 30+ year horizons, then secular shifts that alter the investment landscape should be a primary concern. 

The views and opinions expressed are those of Michael Ashley Schulman, CFA and Hollencrest Capital Management and are subject to change without notice. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.