Trends Watch: December 22, 2016
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 Maneesh Shanbhag, Co-Founder and Partner, Greenline Partners.
What is your outlook for the alternative investment industry?
To us, the alternatives industry is just a fee structure, which will have to come down as more strategies become commoditized. Since around 2003, when industry AUM first neared $1 trillion, returns have moved in lock step with public equity markets (although much lower). In competitive markets, which we all compete in, high fees only serve to transfer the promised benefits of high returns from those who put their capital at risk to the managers. In other words, the industry skims off the top of society. And this was fine in the 1990s when alternatives was a cottage industry with primarily qualified individual investors as clients. Today we are talking about underfunded pension plans participating in this wealth transfer away from their beneficiaries ("Main Street") to the managers. As a result, fees will have to come down significantly and the number of players will shrink too. We see this as a good thing on net. If politicians had the will to remove the carried interest taxation loophole as well as increase taxes on short-term trading gains, these too would help reduce the use of markets as a casino.
What is your outlook for the economy?
My outlook doesn't matter, it is more important to understand what markets are pricing in and how this has changed recently. Markets have voted resoundingly since the November 8 U.S. presidential election that future growth and inflation will be higher here in the U.S. as indicated by rising bond yields and equity prices. We will see whether this future growth is delivered. Bond yields have risen and the curve has steepened indicating that the Fed will raise rates more quickly (up to 1.5% in 1 year instead of 3 years as was priced at the end of June). But we also cannot ignore the long-term backdrop that the developed world is still in the midst of a debt deleveraging. And this combined with our inability to meet entitlements (Social Security, Medicare, pension benefits, etc...) are all deflationary pressures that investors need to protect against in their portfolios.
What keeps you up at night?
Nothing about our portfolios keeps me up, which we think is the best rule of thumb for portfolio construction. Knowing that deflation and high inflation tend to be the greatest destroyers of wealth, we are always protecting against these shocks. Keep it simple and well understood so that you can sleep at night. The prospect of low long-term returns in the wake of stimulation from global central banks that has driven most asset prices to historically high valuations is concerning. This too will serve as a head wind to the high fee alternatives investment industry as the fees will eat up a greater percentage of even lower future returns.