Mauldin Addresses Investing In Disruptive, Darwinian Economy

We tend to agree..... Aivars Lode

“If you are a pension fund trying to get a 6.7 percent return, there is a technical word for it,” financial writer John Mauldin told attendees at the Inside ETFs conference earlier this week. “You’re screwed.”

Financial advisors who can deliver clients returns of 5 or 6 percent over the next decade without taking absurd risks will eventually be rewarded by their clients. “Half of you won’t be in this business in a company that looks anything like the one you are in today,” Mauldin predicted. “Past performance will be based on fundamentals that no longer matter.”

As the pace of change in technology, health care and everyday life accelerates over the next decade, financial advisors and their clients will be compelled to adapt to a different world or suffer the consequences. While the opportunities in growth areas like nanotechnology, robotics, health care and automation will be far-reaching, Mauldin said, the number of industries and people displaced will rock modern society.

Just examine what longer longevity means for the insurance and asset management industries. Insurance companies focused on life insurance will benefit as policy liabilities get deferred into the future, while long-tailed liabilities like pensions and annuities will leave companies overweight in these areas scrambling for relief, in Mauldin’s view.

“The world will be divided into doers and thinkers,” he predicted, adding that this was relatively good news for advisors since they tend to be thinkers. “Doers won’t get paid very much.”

For the majority of people in developed nations, economic change could be threatening. Mauldin cited one study predicting that as many as 15 million workers in the U.K. and 75 million in the U.S. could lose their jobs. Signs of future problems are already surfacing, as evidenced by the growing number of white men in their 40s and 50s suddenly dying from drugs, alcohol and suicide.

“Thinkers will have to create new jobs and new industries but it will be an uncomfortable transition,” he said. “There will be a lot of angry white men and a lot of angry black men and white women and black women.”

With so many people being displaced, one can expect higher taxes, including a consumption tax. There will be a race “between how much wealth people can create and how much the government can destroy,” Mauldin declared. “It will be a close race.”

On a more positive note, Mauldin said that within a decade Iran will become one of America's best friends as the young people take over and the mullahs depart the scene.

- Evan Simonoff, Financial Advisor Magazine

Blackstone earnings miss forecasts as investments weaken

Blackstone underperforms, especially its credit group.  Perhaps if they had a greater industry versus generic focus the returns would be better.  Aivars Lode

Blackstone Group LP (BX.N), the world’s largest alternative asset manager, reported weaker-than-expected fourth-quarter earnings on Thursday as falling oil prices and a choppy credit market dragged on its investments.

Economic net income, which accounts for unrealized gains or losses in investments, dropped 70 percent to $435.7 million, or 37 cents per share, from $1.4 billion, or $1.25 a share, a year earlier.

On that basis, analysts on average had expected 45.5 cents per share for this key metric for private equity firms, according to Thomson Reuters I/B/E/S.

It has been a tough few months for private equity firms. Besides smarting from energy investments as oil prices tanked, dealmaking has also suffered since November due to the toughest financing conditions since the 2008 global financial crisis.

The market for high-yield bonds, the lifeblood of buyout deals, has frozen as banks struggle to sell them in syndicated sales. Banks are also lending fewer of the riskiest junk-rated loans that fund buyouts, further tightening financing conditions.

Blackstone’s income based on the performance of its investments slid across the board. The private equity, real estate, hedge fund and credit divisions all suffered, but the credit arm took the biggest hit as losses doubled to $90.5 million from a year earlier.

But even as investments weakened, investors handed Blackstone more cash to manage. Assets under management increased 16 percent to $336.4 billion, with growth in each of its investment arms.

Distributable earnings, which show the actual cash that Blackstone has available to pay dividends, slumped 23 percent to $878 million, or 72 cents per share.

Founded in 1985 with just $400,000, Blackstone is a leading buyout firm due to the sheer amount of cash that it manages. It was the first of its peers to report fourth-quarter results.

- Reuters

PE activity in U.S. MM still at record high as value falls 12%

What will that mean for the future of those deals done at a much higher valuation???  Aivars Lode

Private equity dealmakers kept up a torrid pace of investment in U.S. middle-market companies last year, closing over 2,000 deals for the second year in a row. Yet, in another instance of the general PE slackening we have observed as of late, total deal value declined by nearly 12%, according to our 2015 Annual U.S. PE Middle Market Report. The report delves into how trends affecting the overall U.S. PE landscape are manifested in the middle market, analyzing activity by MM segment and sector. It also covers MM exits and fundraising. Click here for free access to the full report, sponsored by Madison Capital Funding.

Strategists advise real estate investors to prepare for next downturn

So where next to invest if strategists advise real estate investors to prepare for next downturn?  Aivars Lode

As concerns about the global economy weigh on stock markets, real estate investors are being advised to prepare for the next downturn in their sector.

LaSalle Investment Management has published its latest strategic note, advising investors “to take out cycle insurance” to safeguard against the advent of falling or plateauing values.

The company’s investment strategy annual recommends taking precautions as more markets enter a mature phase in the “real estate pricing cycle”.

It recommends reducing portfolios of non-strategic assets, reducing leverage and being aware of liquidity needs if and when credit tightens.

In the short-term, investors should focus on taking leasing risk where markets are strong, pursuing development in strong, supply-constrained markets and “bidding on strategic long-hold assets that are most likely to be able to withstand a downturn”.

Jacques Gordon, global head of research and strategy at LaSalle, said: “Real estate investors have enjoyed six consecutive years of positive value increases in most countries and now is the time for them to take out ‘cycle insurance’ – to assess their portfolios in preparation for the inevitable transition from rising values to either a plateau or falling values.

“In this mature phase of the capital markets cycle, we highlight various forms of defensive ‘insurance’ that portfolio managers can use to prepare for an uncertain future.”

American Realty Advisors has also warned investors against the temptation to “stretch for additional yield and shoot for making outsized gains”.

In a research note, the company said: “Rather, conditions suggest that now is the time to focus on stability, superior income growth, and pricing resiliency as the likelihood of an economic downturn or financial instability event increase.”

Prepared by Chris Macke, managing director of research and strategy at American Realty Advisors, the report said: “There is more downside to being overly aggressive than overly conservative”.

It continues: ”Despite the warning signs, some investors continue to take on more risk, seeking out smaller markets in search of marginally higher yields at a time when prices are elevated, the economic recovery is entering the mature phase, global growth is weakening, and financial market volatility is increasing.

“This is likely happening since multi-asset investors are facing weak equity and bond returns and are incorrectly relying on commercial real estate to be the alpha generator in their portfolio.”

- Richard Lowe, IPE Real Estate