Gries Financial Economic and Market Update

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Presentation transcript:

Gries Financial Economic and Market Update November 14, 2018 Ken Brodkowitz Partner, Chief Investment Officer Gries Financial Partner

Market Recap

Was October The Beginning Of A Correction ?

Markets Usually Enjoy A Post Mid-Term Election Respite

Asset Class Total Returns Before & After Mid-Term Elections

U.S. GDP Growth Should Be Strong For The Next 12 Months

Accelerating Govt Spending Is Boosting Growth

Real GDP Has Broken From Its Trend Since 2008

U.S. Driving Global Growth

Tax Reform Providing Cushion For U.S. Trade Disputes

Impact Of 2018 U.S. Trade Actions On Equity Markets –Through October 12, 2018

Trade Concerns Have Sparked A Flight From Emerging Market Assets Despite Their Solid Fundamentals

Political Uncertainty Surrounding Trade Will Remain A Drag On Growth

Inflation Is NOT Pushing Rates Up Inflation Is NOT Pushing Rates Up. Rising Potential Growth Is Driving Rates

Rising Rates Will Eventually Have a Drag On Economic Growth

Pre-Tax Income Growth Decelerating

Peak Earnings Don’t Necessarily Mean Peak Markets: Average / Median S&P 500 Returns Following Peaks In Earnings Growth

Never A Recession With Corporate Profits Up

Rising Corporate Debt Is A Growing Concern

S&P 500: Returns Based On Time Until Next Recession

Recession Risks Are Rising But Not Imminent

The Market Goes Up Until The Fed Stops

Higher Equity Valuations Can Result In Larger Drawdowns

Capital Market Assumptions Suggest Lower Returns Over The Next 3-5 Years

Lower Returns Without A Reduction In Expected Volatility

Broad Diversification Holds Long-Term Benefits

Rethinking Diversification Rethinking Diversification. Today, Stocks And Bonds Are Less Useful Diversifiers Than They Have Been In The Past

The Private Marketplace Has Expanded Rapidly, And Represents A Relatively Untapped Landscape Of Opportunities

Portfolio Construction In a Low-Return World Cash Flow: In a low-return world, income generation becomes increasingly important. Our goal is to seek out unique yield- oriented strategies designed to generate well above market cash flows. Uncovering Inefficiencies: Varying factors such as regulatory changes, liquidity and a general misunderstanding of complex situations has created several idiosyncratic opportunities that should contribute attractive risk-adjusted returns. Liquidity Premiums: Empirical research has documented the existence of a liquidity risk premium across a variety of asset classes. For investors with longer-term investment horizons, having a portion of a portfolio allocated to illiquid assets offers an attractive source of returns.

Key Takeaways Late Cycle Economy: U.S. economic growth is strong and global growth is solid, but 2018 may be the peak for both GDP and corporate earnings growth. Mounting Headwinds: Rising interest rates, Fed tightening, elevated valuations and trade tensions will restrain future growth. Recession risks are rising but not imminent. Limited Returns Ahead: CMAs suggest returns from core equity and fixed income assets are expected to be muted with periods of elevated volatility. Portfolio Construction In A Low-Return World: Traditional portfolios rely heavily on the market’s directionality to deliver returns. Moving forward, an unconstrained approach that emphasizes cash flow, special situations and the liquidity premium is needed to meet return targets while mitigating volatility.

Navigating A Low Return World: Strategy Examples PIMCO Flexible Credit Income (PFLEX) The Flexible Credit Income Fund is an interval fund that utilizes a directional multi-sector credit strategy that aims to provide investors with attractive risk-adjusted returns and current income. The less liquid interval fund structure allows the fund to expand its opportunity sets in global credit markets, enabling PIMCO to dynamically allocate across global consumer, corporate, mortgage and structured credit markets, including both public and private opportunities. Unlike traditional closed-end funds, interval funds are continuously offered and provide liquidity via periodic share repurchases at net asset value (NAV). BlackRock Event Driven (BILPX) A robust background coupled with weak demand due to marginal participants leaving the space has created one of the strongest dynamics in the past decade. The annualized M&A investment yield is currently 12% vs. 10-year median of 6%. The fund focuses on equity and equity related securities of companies that are undergoing transformative corporate events, including announced mergers and acquisitions, spin-offs and split-offs, financial or strategic restructurings, management changes, and other catalysts. Although predominantly focused on “hard catalyst” opportunities, the fund does utilize entire catalyst spectrum to build its portfolio. They look for opportunities where they believe there is mispricing, the ability to isolate an event and where these is a well-defined path to value realization.

Navigating A Low Return World: Strategy Examples (For Qualified Investors Only) Kayne Anderson Real Estate Debt (KARED III) The primary opportunities are investments in 1) Freddie Mac structured products and 2) debt originations predominantly secured by multifamily housing, student housing, medical office, senior housing and self-storage properties. Both require specialized knowledge and sourcing advantages. Kayne Anderson possesses distinct advantages when investing in these commercial real estate debt and securities due to sourcing advantages that include a strong relationship with Freddie Mac, commercial banks and other lenders, intermediaries and real estate investment firms, a track record of successfully acquiring Freddie Mac structured products and originating debt and the differentiator of having a 40+ person vertically integrated real estate equity team with operating capabilities in the target sectors. The fund is targeting strong cash yield with 10%+ net IRR. EJF Trust Preferred Fund (EJF II) The EJF Trust Preferred Fund is focused on investing in Trust Preferred Securities(“Troops”) issued by banks and insurance companies and Collateralized Debt Obligations (“CDOs”) that hold Troops collateral. EJF believes there are compelling sector trends for bank Troops including regulatory changes that should greatly benefit smaller banks and the Troops sector. EJF’s demonstrated edge is their ability to view opportunities through an investment banking lens by leveraging fundamental analysis, structural knowledge and capital markets experience to identify and monetize catalysts.