Question for the Class: What Are the Unloved Asset Classes?

Investing is a little like Lake Wobegon, everyone thinks they're above average. We all know that's impossible in the aggregate, especially after fees.

Read any book by the saints of investing history and the same theme comes through time and time again--you have to be outside the herd to outperform. You have to be uncomfortable. You have to see a pot of gold where others see bees and sharks.

Again like the residents of Lake Wobegon, we like to say we're contrarian. But often, we're not. We follow trends, chase performance, and fall victim to any number of cognitive biases.  We’re just wired that way.

With that in mind--what is the out-of-favor, contrarian trade right now? Shorting FANG doesn't count--if you were a long-term investor, what asset class do you put your money in here to maximize risk-adjusted returns? What asset classes have been left behind by the huge asset inflation experienced in markets across the world during the QE-era?

Here are a few options that I believe we can agree to throw out:
  • Domestic stocks, which are trading at valuations never seen this side of the tech bubble,
  • Developed market fixed income
  • Credit of virtually any variety I can think of
  • Real Estate, which is touching all time low cap rates

Going back to the pension funds I brought up last week, as well as a couple of other big real money investors I have poked at since then, the consultant industry is pushing real money towards greater allocations in private equity, which has seen returns above those of public equity markets in recent years. While consultants are by definition incapable of making out-of-consensus recommendations, I think these three charts argue that private equity is far from "contrarian":

#1….2/3s of private equity’s portfolio companies saw margins contract relative to PE fund general partners didn’t improve the operations of their companies…
#2...Yet private equity has done well...why? Multiple expansion

#3... there is $1.4 trillion (!) in “dry powder” looking for the next private equity trade. This is money committed to PE funds but yet to be deployed...all chasing performance in an industry that saw margins contract in 2/3s of their portfolio companies...meaning they didn’t improve the companies, they just got in at a good price.  

And I’ll spare you another chart---but buyout p/e multiples are at all time highs, and while off of 06-07 highs, debt/ebitda ratios are pretty spicy too.  

What does that leave on the menu? (feel free to add your own here)
  • Foreign Equity, presumably emerging markets
  • EM fixed income, presumably local, not USD
  • Foreign Real Estate (cheap markets raise your hand….not so fast, China, Canada and Australia)
  • Smart Beta (?)
  • Robots, AI, machine learning (?)
  • Real Assets...oil/gas, timber, etc.
  •’s the one that always gets people Or

Cash with a touch of gold to protect your purchasing power against profligate central banks will keep you within spitting distance of inflation and is the original long-vol strategy. You have the ability to buy assets at cheaper prices in the future at a time when virtually any asset class I can think of (please chime in with a cheap one!) is expensive by historical standards.
You’re going to feel uncomfortable. You’re friends are going to call you insane. You need to withstand more than a bit of career risk.

You will be the most boring guy at the next cocktail party. While your friends and colleagues are talking about the next PE unicorn they are chasing, FANG stocks, or dare I say, the pile of money they made in the EMFX carry trade, you’re going to brag about how you squeezed an extra 5bps out of your money market trade by locking in a juicy term reverse repo. Your date might leave with the Argentine guy with amazing hair.

Hmm, cash and gold seem to check a lot of boxes. Tell me what asset class you think holds the title.


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Click here for comments
July 20, 2017 at 9:26 AM ×

I agree with your comments. It is very hard to find value these days. And yet it is likely still a bit too early to short equities in a meaningful way.

An interesting investment idea might be Iran. Haven't done a trade yet (still investigating) but there are several things looking interesting:
- it is a quite idiosyncratic story - i.e. in theory not much correlated with global equity moves
- trades at a decent discount vs. comparable EM
- indirect long oil trade
- basically a bet if there will be unified sanctions against Iran in the near future again (i.e. including Europe)

Would be great to get some feedback on this. Thanks

July 20, 2017 at 6:11 PM ×

Yeah, cash and vol of vol..... !!! Yeah, babee....
Sexy choices that LB has been boring people with for months.

Wait - ? where did she go?

July 21, 2017 at 7:00 AM ×

Hey, LB, how did that bet go I made here with you 12 months ago that the wild New York Warriors would find a way to make it over to the New York grand parade any way it could with sponsorship money and a piggyback here and there.
I'm sorry ,but not sorry....but you have to bring that one out into the open and wear it..... In downtown New York! LOL.

ps.....getting to know you is going to make my stay in Thailand so much better!

July 21, 2017 at 10:09 AM ×

Hey, refunds. In Victoria the rules are when there is a late scratching you get the "sub".

Daddymac has another sub for you to piggyback on,LB.
But, obviously , recent form may not be attributive to its current price.

You may best be creeping around for an each way saver in the New York Handicap for starters that have been in training at the Brooklyn red light paceway due to familiarity with jumping that half mile gap dirt crossing, and ducking wide of that vicious cat that runs out onto the course proper before sunlight every morning. It's an obstacle track that's best suited for each way punters!

July 22, 2017 at 12:05 AM ×

Someone mentioned this the other day -- retail REITs are pretty beaten down. KIM, SKT, etc. I think the "AMZN will kill everybody everywhere" thing is a bit overdone. Although they might ;-)

July 22, 2017 at 5:51 AM ×


This market will be done when "Daddymac" (bankers) stops bowling for those chapter 11 business's and the Brooklyn Red Light Paceway club members. Daddymac seems to think that no one will remember down the track his monetary interference in the market due to the team he is bowling for. Wrong. I will remember everyday from next week when I return to the trading desk. For everyday Daddymac continues to be a distraction to my trading desk it will be another tick on the chart that I don't give a flying f##k about your pals. Daddymac, my stock will breakout one day.

July 22, 2017 at 12:38 PM ×

Thanks for all the great posts Shawn !

Still like Irish real estate a lot, huge demand/supply only to get worse with Brexit. Also think that cash is a great choice as expected returns are very low here (at least for eqtys and fi) , though part is bearing the ST underperformance.

Also, closed out my FCX long on friday. Even though I was expecting a bigger move it was still a pretty good run. Iron ore corrected quite a bit near the end of the week and copper just had a demark 13 on the daily. China credit impulse still going down and don't expect them to really do much until the congress. Put on a copper short after closing out FCX as I don't really see any catalyst for more upside, stops at 279. Economy wise everything seems very lethargic.

Still feel that EZ eco outperformance vs US has been overstated and will likely reverse very soon. Playing it with ED612 steepener vs ER612 flattener, which stayed flat despite recent EURUSD rally. On the eur rally, I was a bit surprised that BTP-Bund spreads held so well. Peripheral spreads seem to be key for Draghi so as long as they remain tight I don't expect him to be much help for eur bears.

July 23, 2017 at 10:28 PM ×

Try US MLPs. Historically have traded as bond proxies, now trade with oil. Really more natgas than oil. But compared to other yield investments very cheap. Look at WPZ, EPD, MPLX, ETP, ETE, BPL and DCP for some large cap names. For those wanting 1099s rather than K-1, AMZA as an MLP ETF and SEMG, CORR, OKE, WMB ,TRGP and TEGP as some C corp midstream names.
Retail REITs are beaten up, but maybe strip centers rather than mall, so KIM and DDR.
Also some health care REITs, like OHI.

July 24, 2017 at 3:59 AM ×

Cool, thanks for the comments guys. @macrowatcher...the ED/ER box!! I like it, given the stability relative to EURUSD. I'm more disconnected from the copper scene than I have been in quite a while, but just on the chart I like the short side and underlying china credit theme. @whammer, I like the contrarian nature of retail REITs idea...I'm sure if you have the resources to do the valuation work on some of these names there is some value to be found--for me it is hard to get away from my experience at a sears in a big regional mall on Friday. I walked throughout the second level, no customers. Then downstairs, and went through half of that, no customers. Finally found an old guy buying nails in the tool section. Tough to believe it was too different in the JCPenney.

July 24, 2017 at 10:00 AM ×

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Value pick

July 25, 2017 at 5:38 AM ×

Shawn, agree, Sears is toast. You know Lampert has completely lost his mind when he gave his brand away to AMZN. Kenmore deal was a desperate move and one of so many he made over the last few years to keep SRG afloat (the only reason to keep the stores open). While it is up with other retail REITs I would not touch it with a 10' pole, just like SHLD. Kenmore represents only 10% of the appliance market, and now that AMZN carries it there is no need to go to Sears store any more. I guess that may just be the nail on SHLD coffin. That's what the old guy bought the nails for.

July 26, 2017 at 5:08 AM ×

ha, maybe so... see now, you could write for the Economist...

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