Is your asset mix positioned for Trump victory?
A new chapter of populist politics was written in the United States last night with Donald Trump’s stunning victory over Washington insider Hillary Clinton in the most divisive election in recent U.S. history. Polls leading up to election night showed a tight race but with most pundits giving the nod to Clinton. Trump’s sweeping victory has taken the world by surprise and given rise to comparisons to the U.K.’s vote to leave the European Union – Brexit, American style.
Market volatility in the short term
The Trump victory created overnight volatility but markets have rebounded today. Bond yields have risen and the U.S. dollar was down in trading this morning against major global currencies (e.g. Euro, Yen). We have seen from previous market shocks that it takes some time for the market to figure out who the winners and losers are, so expect volatility to continue. The longer-term implications of a Trump presidency remain to be seen.
We have been standing by with cash on the sidelines in our two equity funds and are ready to act if and when valuations fall within our strike zone. We are underweight bonds and the ones we own are short dated. Because of these factors and the breadth of our investment universe, including alternative, private investments, our clients are less exposed to public market volatility.
Our Newport Investment Committee has continued to focus on adjusting asset mix within our private yield holdings. Specifically, we recently made the following strategic decisions:
New mezzanine debt investment
We increased our weighting in private mezzanine debt through two different investments. We allocated more money to an existing manager and we made a new investment with a specialist manager new to our roster that has successfully deployed $7 billion of equity across 104 investments in debt and distressed transactions since the 2008 financial crisis.
As we’ve written previously, the mezzanine debt opportunity has become attractive as traditional lenders have become constrained by regulatory controls and financial scrutiny. Returns are a combination of high yields and some capital appreciation.
Taking profits on Canadian commercial real estate
We are selling a portfolio of mature commercial/retail real estate properties that we have been invested in for several years. We have enjoyed income and growth from these investments and it’s time to take profits. Prices for commercial real estate have become frothy due to an insatiable investor demand for yield and an influx of foreign buyers. We believe we can redeploy our profits to other yield investments that have greater potential and a higher margin of safety.
If you aren’t sure how, or if, your investment portfolio is positioned for the current market environment, feel free to reach out and ask about how to obtain a second opinion.
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