Happy New Year!
As we reflect on another busy 365 days, we are grateful for the wonderful clients, business partners and team here at LotusGroup.
One of the firm’s greatest strengths is the network of collective relationships we build each day across a wonderful group of individuals and families.
That being said, we hope that you too were able to refresh, recharge and spend time with family/friends over the holiday season.
Our team took the time to relax a bit while also preparing for another ambitious year ahead.
We look forward to visiting with you all in the new year
Public Market Update
2019 was a rebound year for public equities with most major markets rising after a down 2018.
In the US, there was appreciation in all major sectors with the highest returns coming from growth tech companies (see Chart I below):
Chart I – S&P 500 2019 Sector Returns – Source: Morningstar Direct
Foreign equity returns lagged those in the US, but they still displayed meaningful appreciation.
Commodities, real estate and fixed income also had positive returns for the year, mainly driven by lower interest rates.
So, what were the major drivers of this return?
To begin, after double-digit declines in 2018, global investment markets were ripe for any good news.
The Federal Reserve obliged by reversing a multi-year interest rate-raising trend.
However, they didn’t just pause, but rather completely reversed course with 3 rapid interest rate cuts.
As a matter of perspective, the prior precedent for cutting rates was only when the Fed thought we were entering a recession (see Chart II below).
Chart II – Historical Fed Funds Rate (0.75% reduction in 2019)
Lower interest rates provided a boost to investor sentiment.
Anything that was interest rate sensitive began to rebound, including fixed income, real estate, leveraged equities, etc.
Secondly, Trump and Chinese President Xi progressively moved closer to a trade agreement.
This part was to be relatively expected given Trump’s desire to have a deal prior to the 2020 election campaign.
However, the Fed surprised the market again in 2H/19 when they also restarted massive debt purchases.
They claimed these purchases were to support money markets and that it wasn’t a fourth round of Quantitative Easing.
However, the net effects were substantially similar as they abruptly reversed their year’s long balance sheet reduction and started printing money once again (see Chart III below).
Chart III – Federal Reserve Balance Sheet (Increasing Again in 2019)
With the Fed once again providing new money to banks and the markets, the money was searching for a home.
So what does this mean for 2020 and going forward?
As is often the case with equity markets, major Fed distortions can significantly alter investor sentiment and overshadow investment fundamentals in the near term.
Longer term, there is valid debate around the potentially harmful effects of the Fed’s lower rates and balance sheet bond purchases.
- How much will lower interest rates harm retirees with cash savings (e.g. lower rates in money markets)?
- Will lower rates further encourage the excess use of leverage, which when reversed could prove harmful?
- How will the Fed ever get their $4T+ of purchases off the balance sheet without major economic turmoil?
- Is the precedent now set that we cannot tolerate even a mild recession and the Fed is to act on any tremors…while building towards a longer-term catastrophe?
As we enter 2020, LGA’s public investment team continues to contemplate these questions.
We continue to operate investment portfolios based on our client’s stated guidelines (e.g. fully invested vs tactical, etc.).
We will also continue to maintain our discipline in searching for investments with strong fundamentals and intrinsic values.
However, we wouldn’t be surprised if markets had a choppier 2020 with investor expectations and sentiment much more euphoric today relative to where they were a year ago.
As always, we encourage clients to continue focusing on their long-term plans/goals and sticking with an investment strategy that match their behaviors and preferences.
Private Portfolio Update
The LGA team worked hard to deliver results for clients in 2019.
We continually pushed to provide more consistency, transparency and reliability.
Overall, we saw tremendous growth and an expansion of investment offerings for clients (more below).
Our distribution team cultivated several important relationships across the country and ultimately exceeded our initial fundraising goals.
This expansion importantly helped us to achieve greater support for each offering, to increase diversification, and to reduce costs with larger scale.
Our operations team also helped to simplify and automate client’s private investment reports.
Finally, our supplier management team continued to work hard on addressing issues with two of our client’s previous fourteen investments.
LGA IncomePlus ($19.4MM Fund-of-Funds)
IncomePlus Fund held its final close in Q3 of 2019 with a total raise of $19.4MM.
The fund has historically provided consistent and fully-covered 6% annualized distributions to investors, and we increased these amounts in Q4/19*.
We continue to further optimize the fund’s current holdings and there remains a four-year investment period.
Talks regarding IncomePlus Fund II are progressing with a late 2020 launch date targeted.
We plan on providing more details in the coming months.
LotusGroup Longevity Fund – “LLF” ($23MM Direct Life Settlements Fund)
The LLF team has successfully delivered at the top-end of our return expectations for 2019*.
Additionally, we have moved beyond the early stage Founder Share round and initial 65-policy portfolio to the more diversified accredited Investor Share class.
The LLF portfolio has grown to 79 policies with another 17 in various stages of closing.
LGA clients have been increasing their participation in the fund based on appropriateness and timing of their transition from previous life settlement investments.
Further, our distribution team has a strong pipeline to help raise more external capital and contribute to further fund diversification.
Finally, our Asset Management team is looking to add an additional member or two in 2020.
LLF’s Investor Shares are now open and the fund will continue to hold monthly closes – speak to your LGA private client advisor for more details.
We wish you all a fruitful and prosperous new year!
The LGA Investment Team!
*Note: For specific performance results, clients may contact their LGA private client advisor and request a regulatory-approved documentation of such returns.