January 2023
Chris and Meghan also discuss BlackRock’s withdrawal restrictions on property investors, which happened earlier this year. Meghan says many investors incorrectly assumed how liquid BlackRock’s broad real estate investments are. Meghan usually prefers more niche real estate managers as they may be more patient and focused with the size of the sectors they choose to invest in and when to buy.
Chris and Meghan agree it is extremely important to evaluate the structure of an investment, the amount of access a manager has to investors’ cash, and the impact other investors’ decisions can have on one’s assets.
Going into 2023, Meghan says the private credit space continues to be attractive as there is usually a tighter range of return compared to stocks and bonds. She will also continue to evaluate the public market and other potential investments based on three core tenets: cash flow, true diversification, and risk management. Meghan explains that risk management does not mean avoiding risk, but properly assessing the risk relative to the potential reward.
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Ep. 15 End of Year Market Reflections
Ep. 14 The Future of Bitcoin and Crypto
Hello, everybody, and thank you for joining us for another episode of The Financial Commute. I'm Chris Galeski your host, joined by Chief Investment Officer Megan Pinchuk. Meghan, thank you for joining us.
Thank you for having me.
Started 2023. 2022 was very interesting from an investment standpoint. You had stocks and bonds, a lot of volatility, but there are some bright spots to 2022. Do you want to share with us what some of those things were?
Yeah, I think we are really, really pleased with how resilient a lot of the illiquid assets are that are in the portfolio. So over time we've been moving more and more away from just having stocks and bonds and trying to build in just different things and things that will have different risks will react differently when the economy behaves certain way, when interest rates move.
And so we've been building those in over time. It's been kind of a real strong focus and mantra of ours. And we were really happy with how it how it held portfolios be more resilient in 2022.
Yeah, I think that that was a bright spot, having access to some investments that are not as correlated to stocks and bonds, but somewhat illiquid. And so liquidity is often a topic or discussion with clients and, you know, very difficult to navigate what's the right amount of money that you need liquid so you can touch and make decisions with tomorrow versus invest long term.
Yeah, and no, it's okay. And we've also felt like stocks aren't really that liquid.
It's they are liquid in the sense that you can hit a button and sell them. But the second part of liquidity, actually, when you think about okay, liquid, I can actually get it. That's great. The other piece of it that's important, though, is at what price? So can you get it at the value it is or are you going to have to buy it to get your liquidity at a big, big discount or haircut?
So I think that's the challenge with stocks is that people think of it as, Oh, I can sell them, but if the market tanks or it has a really tough period, you wouldn't want to sell them. So clients really should think of stocks almost as an illiquid part of their portfolio that that's not the piece they're going to go to for liquidity.
They're not going to touch that for a while. Yeah, but you brought up something interesting related to how much of a portfolio should be illiquid. And we do a lot, not just on the investments type of financial planning that I think helps answer that question, but the answer for most everyone is not 100% illiquid, right? But also not 0% unless you know you need that money in a very short term period.
There's usually some level of illiquidity that's appropriate. And the truth is, if you're going to have let's say you're going to have you might need all that money six months, a year again, maybe you shouldn't be taking any risk. Like no investments are probably appropriate.
Yeah, that's a good point. I mean, stocks have always been treated as like, oh, well, I could just sell it and have access to my dollars. And I've always found the concept really interesting of, you know, how do you properly value something like an Apple? I mean, it's a very complex business. If they made a toothbrush, I'd probably buy it tomorrow.
That's not an endorsement. I just like the products. But, you know, if somebody had to sell something tomorrow or immediately, if it's a piece of real estate and they really needed the money fast, they're probably not selling it at the best price. Right. And so something that happened that was interesting to me, at least, towards the end of 2022, was Blackstone has a large real estate investment trust.
They have some liquidity options for people to get money back, but it owns a lot of very illiquid pieces of real estate. What are your thoughts on how investors are impacted by that?
I think that the you know, investors that made a lot of headlines and I think it panicked a lot of people because they were probably either not explained well to them upfront where they didn't understand. They were told, oh, you can get your money back quarterly. And that was okay, great, it's quarterly, no problem. But if you read the fine print, you looked at the structure, right, they are, you can get money back quarterly, but only so much money can get out. They’re keeping a certain amount of liquidity and they can make these payments, you know, at an interval. But to your point, the bulk of their assets are in long term illiquid things. So now people are, oh, what's happening and is this a problem for the industry?
That structure worked exactly how it should have. So it you don't want to be in an investment where you're holding illiquid assets and the manager has to go fire sale a bunch of stuff and kind of force you out of it. The real issue there is people who were not prepared. They didn't do the planning or they didn't understand what the level of liquidity was going to be. So now they're panicked that all of a sudden they thought they could get it and they can’t.
And I guess Blackstone's real estate investment trusts, not to pick on them, but it was a very large investment vehicle somewhere in the neighborhood of $125 billion. So when you've got that much money to put to work, you're probably owning a lot of things that you like and don't like. What are your thoughts on that?
I don't know, like and don’t like, you’re definitely owning the market, right? So it's like, is real estate a good price? Is it not? You're owning just broad real estate. So versus I think we tend to favor niche managers who either have flat out...definitely have a lot less money to deploy. They can pick and choose. They can kind of be patient if they want to and say, is this a good time to buy, is it not? They can go to different sectors and they can buy deals that are just a lot smaller, where oftentimes I think you get good pricing. I think there's a reason why maybe someone has to sell that's not market related or the property related. So you get a good deal. You know, you get a good buy price and hopefully that really benefits our investors longer term.
Yeah. So playing in a play in a space that can be more attractive at times than just the broader market, you can find opportunities. But when you're investing and making decisions on behalf of our company and our clients, you think structure is extremely important. So where do people go wrong with structure? Or when you're looking at a real estate type of investment, what type of structures are you looking for?
I think that investments are great, having a good investment and being excited about the manager and what they're doing is obviously very important. It's great, but equally as important is probably the wrapper or structure around it and most importantly, how secure your money is. So if the manager is buying great things theoretically, but they have kind of easy access in and out of the money, it's not a great thing.
So we're really focused on find a great investment, but then make sure that the structure around it not only protects you from, you know, just sort of people making bad decisions, but also then protects you from, you know, let's say your other investors in this pool vehicle wanting liquidity. So if you could have a bunch of people hit sell button and get out ahead of you and sort of eat up all the liquidity in a vehicle that's not a good thing, you know, potentially if the funds or the assets aren't appropriate.
So we just we think a lot about how can you protect investors in sort of all situations like there's a lot of scenario analysis, game theory that goes through my head about what could go wrong. And you know, when this happens, how’s the manager going to react? What are the controls they have in place? But that control structure, it's maybe a little less fun than the investment side, but it's very important.
So redemption risk is a really big thing. The manager being forced to sell good investments at a lower price to create dollars to send back to investors. I don't think we've had a situation in the last 15 years since the financial crisis where that's needed to be a concern for people. And so structure can help them with that.
Yeah, anything, anything just that's not liquid. You don't want people to have to go create liquidity too quickly. You want them to have time to systematically, you know, think about what's good in the market sell, or even if it's a bad time to sell in the markets to be able to wait until potentially it's a little bit better.
So, all of these assets like, I love these assets in the portfolios and they're great, but if they don't have the right protections in place, then it's not going to be as great, right? Like if the pricing falls and you're forced to liquidate at the wrong time. Yeah.
As you look out into 2023, what opportunities are you excited about or potentially looking into?
Yeah, there's, there's some really good stuff out there. So for the first time in a long time and I think you had my colleague Hunter on recently talking about bond or credit mutual funds. It's been a long time since any of that was attractive and all of a sudden it's like, Oh, look, this is a whole new, a whole new space.
It’s exciting. I think the private credit space, though, continues to be really attractive. So when you can make private loans, there's a lot more control in place. One of the reasons I like private structures to a large degree more than stock and bond markets is the underwriting, you can just really narrow the range. So it's like there's risks, but I can really, we can really understand the risks and say, okay, like in this scenario, this is what your upside is, this is your downside risk. It's just a much tighter range of returns versus, you know, stocks this year. They could be up 30 or down 30. You could tell me either. And I'd be like, oh, okay, yeah, that's possible.
And so a lot of the times like stocks or bonds, like some of these markets, you are relying on the rest of the world to agree with you, right? Or set a price or say this is a good value. And so I don't really like relying on the rest of the world. I'd rather rely on the fundamentals and say, okay, if this works how I think it's going to, you know, this is going to be my return.
And so continuing to go more in that direction, say, can we find things that are really going to behave differently than stocks and bonds? And again, not saying like we're not taking risk, it's just understand the risks. The risks are different than you're taking just with general economy, interest rates, stuff like that, and continuing to mix that into portfolios.
Yeah...I enjoy that space a lot for a number of reasons. The diversification, the stability with the portfolio and consistency of the returns or income that you can get from that space. Someone once said that, you know, an investment is only as good as the price that you buy it at, you can buy the greatest company in the world, but if you bought it at the wrong price, it's probably not a good investment. Do you feel like structure helps protect that even more?
Maybe to some degree that's what people saw last year, right? You had companies, you had a mix of companies, you had a lot of tech companies who were not necessarily great companies or not well-run or had a lot of issues. And their price went crazy, you know, and everyone was excited. And then it completely tanked last year.
But then you had companies like Zoom, too, that actually they're a good company. They make money like they're you know, maybe they're not growing as fast as they were during the pandemic, but they're still growing. And their price at one point was down like over 80% from its peak. And so why was it? Was that because you know, why is this all of a sudden 80% less in value? And it's just because if you bought at the wrong price, right. When things were too exuberant, it was not a good investment, even if it's good company. So I think alternatives let you control that a little more. Again, just in terms of the price you're paying, you're paying the price based on the fundamentals, not based on where everybody else thinks it's worth.
And so you can say, okay, I know what I'm getting, I know what I'm paying for. And then the question is the exit price too, right? Is there sort of a more streamlined market for realizing fundamental value when you're selling an investment?
Yeah, it's been interesting because the last 15 years we've had a lot of liquidity in the system. Quick, easy access to cheap money. We're sort of heading into a shift where now borrowing money costs a lot more and access to dollars is a lot more difficult. So when you look at making these investment decisions on behalf of our clients and our company and knowing that liquidity is something that we take on from an investment risk, but there are benefits to that.
How do you feel like the shift with easy money policy will affect your decisions going forward?
I think, public markets as an example, are more attractive to some degree. You know, we do all this work and we talked about like the structure and all that goes into it. And you know, they're more complex to a large degree. You might have K-1s or extra documents to do the reporting. So for all of that, I think in this current environment you've been getting a really nice premium in terms of if you would have expected, you know, X in the public markets, you could expect, you know, X plus something, you know, pretty meaningful.
So as public markets, if rates stay high or go higher from here, you know, at a certain point, just regular, the traditional market are going to look more attractive. And we're going to say, okay, we will be happy to buy that, right? I'm happy not to spend the extra however many hours, you know, structuring and negotiating on the structure and things like that.
If it's easy, you know, I'm not doing this to be to be cute in terms of all this extra work. It's because I think it's better. So if public markets are better at a certain point, we're happy to kind of make that shift over time. Yeah.
Now you make all of our investment decisions based off three core tenets risk management, true diversification and investments that generate cash flow. But you have a different perspective on risk management. It's not just the risk that you're taking on. I'd love for you to share with us your thoughts around risk management and really getting paid for the risk that you're taking on, how you compare certain things.
I know. I just answered that for you.
I think it's funny because again, when we say risk management, it's not don't take risk like you're if you don't take risk, right, you can go make your short-term treasury yields, today that's not too bad. But if you’re going to take risk, you know, if you're going to try to make higher returns, you're going to be taking risk.
So it's not about saying let's avoid risk with risk management. It's about saying, you know, can you actually assess what the risk is that you're taking and then do you feel like you're getting paid appropriately for that risk. And I think that's easier said than done. You know, in a market where, again, stocks are flying, everything's great or there's really cheap money, there's sort of factors that are that are impacting that.
I think that analysis became much more difficult, especially in public markets. And so now if you have things normalizing a little, I actually think it’s a little easier to assess or say, okay, does this make sense and am I getting paid properly for the risk I'm taking? I don’t know if I’d quite go with easy yet. But maybe soon.
I do look forward to a day where you're excited to make some investments in some traditional markets and make your lives easier. But in the meantime, you're adding a lot of value to our clients and the company by finding these really cool niche opportunities. So thank you.
My pleasure. And like I said, we'll do whatever...I think we're all kind of philosophically aligned, so whatever is in the best interests of clients, we're going to do it and we're happy to do it. And I think it's so far, again, we I was really happy with last year the resilience of some of this stuff.
But if there are opportunities, if markets go down to a certain level or there's opportunities in the public markets, I think we're going to be looking really closely at that too.
Yeah, well, thanks a lot, Meghan, for joining us. You heard it directly from her, structure is extremely important in making sure that you're paying attention to how much you need liquid versus finding opportunities that maybe have a longer time period to invest in. Thanks, Meghan.
Disclosures:
Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and do not represent the views and opinions held by Morton Wealth. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
