(Bloomberg) After skipping Uber’s initial public offering or perhaps taking a second helping from the crypto market, recommendations range from betting on New York real estate to collateralized loan obligations. Yes, you read that right.
With global markets buffeted in the past three months by geopolitics and global uncertainty, it’s not surprising that our panel has a marked focus on risk and the desire to diversify from more traditional investment markets. As usual, for those with more exotic tastes, we offer such out-of-the box alternatives as Eric Clapton’s guitars and the mysterious wealth hidden in crystals.
Thorne Perkin
President of Papamarkou Wellner Asset Management
We’ve invested for many years with a real estate group called Tavros, and they’ve been good at getting ahead of the curve in terms of New York neighborhoods. They were early investors in Fifth Avenue south, before the Flatiron district got hot, and bought a corner of 14th Street and 9th Avenue years ago in the Meatpacking District that has become perhaps the hippest area in New York City.
They’re investing in Long Island City and were there well before Amazon announced, and then abandoned, its plans to create a corporate campus there. New York, and certainly, Long Island City, would be better off if Amazon had come and stayed, but Amazon could have chosen to go anywhere in the world and it chose Long Island City, which is a massive brand stamp of approval.
We like the neighborhood for a lot of reasons. What everyone complains about in New York is transportation, and the area has spectacular transportation. It’s so close to Manhattan but relatively inexpensive to live there. There are multiple subway lines that go to Long Island City, and you can take a train to Brooklyn and Manhattan without needing to transfer. It has great schools, tons of cultural institutions and beautiful waterfront parks that are just buzzing.
Maybe we’re in the third inning of how the neighborhood develops. In the condo market there’s still limited supply. It’s been a very hot submarket over the past couple of years and for all the reasons I’ve mentioned, it will only pick up speed. If you use a million to buy a condo, well, you’ll do well over the long term, and it’s an amazing place to live.
Another way to play: I’ve played guitar and sung almost all of my life, including some live performing through the years. For me, rock guitarists don’t get more versatile, memorable or iconic than Eric Clapton. To own one of his guitars would be a dream, and it would only appreciate in value. In 1999 Clapton auctioned off 100 of his guitars, raising about $5 million for his rehabilitation charity, the Crossroads Centre. The top lot was a 1956 Fender Stratocaster he named “Brownie,” which he used extensively on stage in the ‘70s. It sold for $497,500. In 2004, another of Clapton’s guitars, “Blackie,” sold at a Christie’s auction for $959,500, also to benefit his Crossroads charity.
Alan Higgins
Chief Investment Officer at Coutts & Co.
Investors are still scarred from the crash 10 years ago and by the multiple corrections in the stock market since. As a result, we believe global equities are increasingly under-owned and underappreciated. Many investors are sitting on the sidelines, while companies and sovereign wealth funds continue to buy equities. This is why this year is known as the flowless rally—markets are up but there have been substantial outflows this year from active equities and exchange-traded funds. We like equities as a source of income, and in fact global dividends have increased more than 30% over the last five years.
A less-mainstream idea is that investors have overcompensated for two things: default risk and liquidity risk. One way to play on that sentiment is to invest in collateralized loan obligations, or CLOs. Remember them from the hangover of 2008-09? These are pools of corporate loans that banks securitize and sell to investors. The securitized market became quite controversial when the U.S. government had to bail out the banks and AIG after certain structured financial products worsened the mortgage crash. Well, too many people have seen “The Big Short,” and they believe the whole of the asset-backed market was a disaster. CLOs were marked down in 2008-09, but the defaults were not en masse. Overall the CLO market is a much more robust asset class than is widely perceived. Internal rates of return are now running at 10% to 14% annually, depending on the vintage.
To get exposure, you can buy anything from AAA-rated bonds to CLO equity, which is the riskiest tranche. Mr. Market moves the values of these instruments around, but what we like is that at the end of the day the return is determined by defaults. Defaults do happen, and Federal Reserve officials and the Bank of England have expressed concern about weakening standards in the loan market that enables CLOs, especially for borrowers with weak credit ratings. Yet for us, this is the purest compensation for taking default risk. The overall average default rate for CLOs is 0.09% and the average change in credit quality has been positive since 2011. So we see the returns going against the trend of the idea that CLOs are a disaster waiting to happen. Instead investors should look at the data.
Another way to play: Attending the best matches at Wimbledon is one of the most coveted tickets in all of sport. So imagine the prospect of owning a pair of Centre Court seats for every day of the tennis tournament for five years, plus the ability to resell those tickets for big profits. You can do this by purchasing Wimbledon debentures, which are essentially the rights to tickets for club-level seats, right outside the Royal Box. The next series, covering 2021 to 2025, are for sale at 80,000 pounds ($101,000) each, and there are only about 2,500 Centre Court debentures available. The last batch, with a face value of 50,000 pounds, is now worth about 120,000 pounds on the secondary market. Our clients typically consider these as a passion investment whereby they may attend some matches, sell valuable days such as the men’s semi-finals, and donate some tickets to charity. I’ve put my money where my mouth is and applied for the latest round from the All England Lawn Tennis & Croquet Club.
Michael Tiedemann
Chief Executive Officer at Tiedemann Advisors
From a pure investment and tax-transfer point of view, we think U.S. opportunity zones are extraordinarily interesting. It’s a terrific, well-intended investment plan, offered, really, by the Internal Revenue Service to help spur economic development in historically under-invested areas.
If you look at the forward return of the S&P 500, most would forecast 6% to 8%. The potential internal rates of return for opportunity zones are in the low double digits, and they are massively tax advantageous in a way that the S&P 500 isn’t.
If you own a single stock that has appreciated greatly over 20 years, say, from a 5% position to 20%, and you want to bring your exposure down, you calculate your capital gain, and opportunity zones let you transfer 100% of that gain into a real estate investment that will have a projected return higher than the broad market. Right now, we are reducing risk within our equity assets, so it’s good timing for us that we can defer or eliminate some of the embedded capital gains tax, but it is a 10-year holding period.
The opportunity zones across the U.S. are without question unequal in terms of appeal. You want to be a first mover, and there may be periods in coming years when it’s not as attractive as you model it out. In two to four years, as many of these areas receive a lot of investment, it will likely get more expensive. That’s the fly in the ointment.
The opportunity zones where we are initially investing for clients are in Cincinnati, Baltimore and Miami. Two of those are construction from the ground up; the other is acquiring and redeveloping existing infrastructure.
The other way to play: I’m interested in the intersection of technology and sports. If you look at how much focus and effort and energy and money goes into high-school and grade-school sports, it’s staggering. I have a small holding in Keemotion, which has automated video-production systems for capturing sports events. I also invested in K-Motion, which has developed a very thin vest with sensors that judge your range of motion, provide data and help you self-correct. It started in the golf industry, but has moved into baseball. These sorts of companies have technology that can be commercialized for professional leagues and scouts, but their application could be very broad and made affordable to the masses, maybe through a subscription.
Would I pay $100 a year to see a game my kids were playing in—live—while I’m sitting at work? You bet I would.
Carter Reum
Co-founder at M13 and member of Tiger 21
In a world getting ever more complex, hectic and interconnected, the need to find time to simplify and disconnect is more important than ever. We know tools and practices like meditation make a difference—but it’s also really hard to get that right. Technology has now become an overlay on nearly every product and category, so I’m very excited to see some of the new technologies and companies that help people do meditation more seamlessly.
The U.S. meditation market is projected to increase to $2.1 billion from $1.2 billion over the next four years, with growth primarily driven by digital apps. Meditation is growing in prevalence, with about 35 million American adults meditating in 2017, according to the Centers for Disease Control and Prevention. Even practice by children has increased, rising from 0.6% in 2012 to 5.4% in 2017.
Brands like Headspace and Calm have each grown to more than 1 million paid subscribers, and companies like Wave Meditation create culturally relevant, music-driven experiences that remind me of the early stages before yoga became mainstream. The easier and more enjoyable the experience is—more like a music app than a meditation app—the more people will be able to participate. If Wave or someone else can build a platform around brand, content, software, music and hardware, I can easily envision the next Peloton emerging. Habits build early, and the practice becomes regular—and that opens up adjacent opportunities in the space, including lifestyle, accessories and technology.
One thing you can count on as an investor is that the world is going to get more stressful. So tools to help people cope with that reality and live in a happier and healthier way are always attractive bets.
Another way to play: Many of my friends are art collectors, and I followed their lead, especially after joining the board of the Los Angeles County Museum of Art. I’ve enjoyed getting to understand the value of collecting traditional art, from an aesthetic and monetary perspective, but recently started to focus on investing in what my brother and business partner Courtney calls “the new art”—crystals. He said his crystal collection brought him more joy than his “regular” art, and he believes crystals have unique powers. This initially seemed crazy to me, but there’s evidence for their impact on well-being, and I’m becoming aware of the real, burgeoning market for crystals, especially ones of larger size and limited supply, which can cost upward of $100,000.
Mark Perry
Managing Director at Wilshire Private Markets
Today’s low-interest-rate environment has driven investors into increasingly risky assets in search of yield. Capital supply has outpaced capital demand in more “traditional” investment instruments, bringing lower expected returns and higher risk in the most commoditized market segments. Fortunately, opportunistic private markets enable an array of solutions that provide investors with the return that they demand, while enhancing their ability to diversify risk.
Two strategies that exemplify this are litigation finance and franchise-restaurant lending.
Litigation finance has existed for years in the form of third-party financial support to litigants in exchange for a share of any financial recovery from the lawsuit. One preferred means of accessing this strategy is more of a credit approach, where highly structured loans are originated to plaintiffs, law firms, or other related legal businesses collateralized by litigation-linked assets and legal fees. By securing loans against pools of pre- and post-settlement litigation outcomes, these credit strategies seek to avoid the binary risk inherent in other segments of the litigation-finance market. The set of specialty finance groups making such loans is relatively small, resulting in a pocket of market inefficiency that enables the potential for outsized returns.
A similar void in “traditional” capital markets has been targeted by groups that provide structured financing to fast-food restaurant franchisees. The quick-service and fast-casual restaurant segments are characterized by simple, formulaic business models that, by virtue of their low price point, have historically proven to be cyclically resilient while benefiting from secular trends in consumer behavior and technological innovation. Specialized groups that target this growing, fragmented segment of the restaurant space can find potential value.
While neither of these strategies is risk-free, the risk bears little correlation to the broader markets and other types of yield-focused investments.
Another way to play: A creative way to access uncorrelated returns is by investing in the future earnings of minor league baseball players. This involves purchasing equity “shares” in a player in exchange for a percentage of that player’s future earnings. Such a strategy is particularly well-suited to baseball, compared with other sports, given its rich quantitative data set. The risk, though venture-like in its binary nature, is balanced by outsized return potential.
