Public Market Update
As of last week, the US bull market that began in March of 2009 became the longest in history, setting a new “record” of 3,453 days.
While the sheer length of our current bull market has been phenomenal, global markets have continued to be relatively flat since 2011 – over seven years (Chart I below)!
Chart I – US Stocks have outpaced the rest of the world since March 2009
Furthermore, fixed income and commodity markets have now been in a declining bear market since 2014-2015.
Needless to say, the one major winner (US equity markets) is very expensive.
The S&P 500 price-sales ratio is as high as it was during the height of the Dot Com bubble and the median company’s price-sales ratio is more than twice as high as it was in 2000.
From a price-to-earnings perspective, the S&P 500 is now 101% overvalued (Chart II below) while trade rhetoric and a rising interest rate environment continue to pose threats to further expansion.
Chart II – The Shiller PE Ratio for S&P 500 – Highly Predictive of the Next 10 Year Returns
Despite the above observations, a strong current economy and peak corporate earnings continue to support the bull.
Historically, markets have tended to begin declining approximately six months prior to a recession in a very leading predictive manner, so we would see a market decline prior to the economy or corporate profits showing any cracks.
On the corporate profit side, we are now six months into companies reporting profits which include the new corporate tax cuts.
There should be two more quarters of such positive comparable results, and thereafter the challenge will increase with tax cuts already baked in.
That would be six months from now.
On the economy front, rather than looking at current indicators (which lag equity markets), it is better to look at leading indicators to evaluate conditions ahead.
On that front, growth has been declining and most recently flat-lined (see Chart III below):
Chart III – ECRI Leading Indicators Show a Flattening Economy Ahead
As we head into the home stretch of 2018, it is expected that continued geopolitical, monetary, and fiscal risk will weigh against the US bull market.
The economy appears to be slowing down ahead, corporate profits will have more challenging comparable results, and valuations are incredibly rich.
As such, we continue to urge caution and believe that much better value resides in select private investments (nearly 50% discounts to public market instruments in select cases).
As always, it is difficult to predict exactly WHEN a downturn will present itself; however, we do believe a heavier allocation to private investments and a more tactical /diversified approach to public markets is the appropriate course of action.
Private Investments Update
Private investments continue to perform as expected.
We will be issuing a wider update in conjunction with this public update, but some highlights include:
- Continued consistent payouts
- An upcoming and early exit on $6.7MM of client investments in our recommended infrastructure>easements funds, with an expected over-achievement of initially targeted IRRs
- An increase in distributions from our direct co-working investment in Denver from 10% to 14% annualized (supported by increasing underlying profitability)
- Continued progress on a $2-4MM workout in pre-leased real estate
Additionally, we have made strong progress with our homegrown fund LGA IncomePlus Fund:
- Investment commitments have increased from $9.3MM last quarter to nearly $13MM today (more scale = better deal flow and lower overall costs).
- We expect further commitments following our first RIA Due Diligence Day on Aug 22 (6 firms were in attendance, representing $2.1B of assets managed).
- Our first 1.5% distribution (6% annualized) has been distributed to investors this week, and was fully covered by underlying returns year-to-date
Investors will be receiving their first statement from the fund this week, retroactive to the Q2, 2018 quarter close.
This statement will illustrate how we have moved above the J-curve nearly instantaneously, with positive returns in our first quarter of operations (very unique within the industry).
We will be holding another close at September’s end for the IncomePlus Fund…please let us know if you would like to add to your slot, or if you have any friends or family interested in the fund before we hit our 100 slot maximum!
New Sister Firm – LotusGroup Capital, LLC
Finally, we have officially launched a sister company, LotusGroup Capital (LGC).
This new firm is targeting the development of direct private funds at a pace of 1 every 24 months.
We are engineering LGC direct funds to have lower expenses and higher returns than the GP partners we are targeting to replace.
As an example, the first fund to launch will be the LotusGroup Longevity Fund (LLF), and we are targeting 14-15% returns in comparison to the 8-11% that Vida Longevity Fund has been recently delivering for our clients.
Having a separately capitalized business, along with a separate staff, will allow for focused development of these new investment opportunities while also allowing the LGA advising team to continue focusing on advising, financial planning and client service.
Please be on the look out for updates and additional information on this exciting new initiative.
The LGA Investment Team