For the Right Investors, Private Markets Make Sense: Mercer Exec

There are more alternative investments now available to mom-and-pop retail investors, but this area is still kind of a high net worth, it sounds like.

Correct. And most of the alternative investments that are available to what you characterize as mom-and-pop investors, frankly, aren’t very good. Most of them are pretty, pretty horrible, to be honest.

In our judgment, those are areas where most investors should probably be careful, especially if it’s a publicly traded investment. You want to be careful.

Arguably, those returns aren’t any better than just owning an index fund, and yet they tend to have very high expenses. So investors should be very cautious when it comes to trying to invest in these alternatives that are designed for, quote, Main Street.

What’s your biggest bearish view or concern and why?

Mega-cap technology. Markets tend to get really excited about something new, and we love things that have done very well in the immediate near term. That’s recency bias. Investors get super excited about companies like Nvidia and these are amazing companies, but typically investors and markets get too excited and they tend to get overstretched. 

So at least in the short term, it would seem to me that we’re going to see some of the buying pressure come out of those companies over the next several months. And so that would be my short-term concern within public markets. I think that’s probably my biggest bearish call at the moment. 

What’s your top advice to advisors on helping clients now? Anything specifics regarding strategic moves?

I’m a big proponent of private investments and the reason I say that is only about, say, 15% of the world’s investment opportunities are publicly traded. And so if you’re serious about delivering high-quality diversification to your clients, I would encourage advisors to seriously look at private investments. By which I mean private equity and private credit, private real estate and private infrastructure.

They need to be careful. They need to make sure they understand those asset classes. So the advice I give my own advisors is that some of the most important continuing education you can invest in right now as an advisor is learning about private investments, learning the nomenclature, learning the different metrics that we use to evaluate performance. All of that is very different in private markets than it is in public markets. 

But given that public markets are a relatively narrow slice of the investment opportunity set for investors, I think over the next 10 years, it’ll be critically important that advisors begin looking for opportunities — high-quality, low-cost opportunities to add private investments to client portfolios.

It’s important for me to also clarify. I don’t mean all of what I consider to be investment gimmicks, things that don’t make sense for most investors. Things like commodities, trading pools, things like cryptocurrencies. I don’t think those are legitimate investments. 

When I mention high-quality diversification, I mean actual investments, owning companies, lending capital to growing companies and somehow participating in the profits, the free cash flow that those companies generate. I don’t mean fancy trading strategies, I don’t mean things like that. 

Who and what are you watching now, whether a key indicator, policy move or particular person?

Well, there’s a lot that I look at, but if there’s one number that I think ultimately is the most important number to watch it is the Fed funds rate, interest rates set by the U.S. Federal Reserve. Because that will influence the price of every investment on planet Earth. So I think that is the most important number to pay attention to. 

Not the election, not the candidates. I know we’re all talking politics these days, but I actually think that’s less material than the interest rate that the U.S. Federal Reserve sets for the U.S. economy. 

My view is that the Fed probably won’t cut rates until the very end of this year after the election. Only because the Fed generally tries to stay out of politics and not make it look like they’re trying to influence any particular political election. So my view is they’ll start probably in December. The market currently thinks they’re going to start in September. I think it’ll be December. 

Pictured: Donald Calcagni