I take for granted that history is filled with major macroeconomic events, and believe that one’s asset allocation and portfolio construction should take it as a given that various disturbances and disruptions will take place at unexpected periodic moments.  The only thing I believe is predictable is that those who are constantly predicting the nature and timing of such things are always, always, always wrong.  When someone says, ‘no, so and so called this,” or “so and so called that,” I always ask for the trade confirmations.  Let’s just say, they don’t write back.

We refuse to manage money whereby we guarantee our clients will fail to meet their goals because they are afraid of things happening that cause them to fail to meet their goals.  I believe that attempts to create a narrative about a certain thing happening at a certain time lack specificity, and if they dare to have specificity, I promise you they will lack accuracy.  And the track record of those who have predicted 15 of the last 2 “such and such events” is, well, not very compelling.

This leaves us with “what to do about bad things happening.”  We invest in dividend-growing companies that we believe will grow dividends and sustain cash flows even in periods of turmoil.  We complement dividend growth equity with a customized allocation for each client that is appropriately invested into other sleeves, silos, and strategies that help achieve the right portfolio for downside comfort, cash flow needs, principal liquidity, tax efficiency, and other such objectives and factors that matter for a given client portfolio.  We adjust when goals or circumstances change.  And we find those who build a portfolio around “earth is ending” scenarios to be guilty of malpractice.

I wrote about this broader subject at great length in the Friday Dividend Cafe. There is no sense in which I believe the potential addition of some private asset investing in some corporate retirement plans is going to create a problem for the asset managers that receive such funds (all of which are going to be first tier players with massive capacity for deployment and whose asset base is so large that these incremental additions of capital will be quite small). Most of this space will create a secondary market for this investing (investors buying and selling pieces of private assets from each other) and not necessarily drive new primary capital to the asset managers for deployment. That said, it will generate new sources of fee revenue for the managers.

The large, top-tier asset managers have high capacity for deployment of capital. The issue is not the risk to them, I assure you. The issue is whether or not plan participants will understand the illiquidity risk of incorporating private investments into their own 401(k) plan. The solution there is for them to, well, understand it. Some things are easier said than done.

The Fed has to leave flexibility for reserves and by setting a tight range it leaves operational bandwidth. The primary tool the Fed uses to effect interest rate policy is open market operations and they can’t ensure that every single transaction happens at the exact same yield, so a range gives bandwidth, and allows them to use their “open market operations” (buying and selling) to effect that range. Banks lend reserves to each other overnight and the Fed sets the target they want that done at, but market forces can move things within a small range, so they set the target to their desired range to allow that flexibility.

The investment premise in midstream energy, given the strength in balance sheets and increase in global energy demand, is one I believe in. In addition, with the shift in Europe’s stance on LNG imports from Russia, and the competitive advantage the U.S. has to produce and supply it, all make it attractive. We view having exposure to active management with unique expertise in the space that can toggle between Canadian names, U.S. C-Corp names, and U.S. partnerships to fully express that thesis as a better approach than owning the partnerships alone. The latter may have a more current income distribution, but the former has a higher total return. Also, keep in mind the distributions from MLPs are treated as Return of Capital, reducing cost basis, making them attractive and tax deferred in the year of receipt. However, when shares are sold later, there will be a combination of Capital Gain treatment on unit price appreciation, and then some level of depreciation recapture taxed as Ordinary Income as well. The final K1 breaks it all down.