Small-Cap Value

The idea: Small-cap companies have lower valuations than their large-cap counterparts and have been kind of ignored up until now. The market is turning back to them, and there’s momentum there and a good expectation that momentum will continue for a bit. A lot of the time small cap is a place where you can get real juice from factors like value and profitability. The potential to have outsized returns is there, especially with the expectation of some Fed rate cuts.

The strategy: Now could be the time to employ an approach in the small-cap space where you take advantage of factor investing, or focusing on certain investment characteristics or qualities believed to drive higher returns. I would diversify across factors as much as possible. Momentum is a riskier factor. I recommend small-cap stocks with the value factor in particular. And having a small profitability play (this would be companies that have high gross profits) can offset risk. You can get there very cost effectively just with exchange-traded funds. There are some good products out there in the small-cap value space.

Fixed-Income Opportunities

The idea: The balance of risk and return in fixed income is compelling in the short term. Our view is that we will not have a systemic default cycle, so there’s opportunity in credit markets, with investment-grade credit yielding more than 6% and below-investment grade yielding above 8.5%. That’s attractive and competitive with the long-term return in equities, plus you have less volatility and greater principal protection.

The strategy: I’d have two-thirds of the million in bonds, and within that, I’d have half in high-yield bonds. Then I’d put 30% in loans, 10% in AAA-rated collateralized loan obligations, or CLOs, and 10% in BBB-rated CLOs. [CLOs are bundles of debt, often rated below investment grade.] Within the CLO structure there are some very attractive yields with very minimal credit risk, and also some areas of the asset-backed market — these tend to be credit card and auto loan receivables — that are attractive.

I’d have the remaining third in equities, with two-thirds of that in US equities and one-third in developed markets. Within the US, our focus is in high-quality large-cap companies primarily in tech and health care, like Apple, Microsoft and Google. The large companies have been able to generate profits very consistently and I think will continue to be leaders. For our overseas investments, it’s mostly Europe and Japan.

Shifting Supply Chains

The idea: We like prospects for economic growth in Vietnam and the Philippines. We continue to see supply chains shift to Vietnam, and it will become a strategic manufacturing hub for everything from apparel to electronics, durables and increasingly automotive and electric vehicle value chains. It’s relatively large labor force is very well-educated and highly skilled but still low cost. It’s next to a lot of port infrastructure, and the government’s supportive of developing businesses and the environment for foreign direct investment.

In the Philippines, growth is being powered by an increasing number of companies moving call centers there. It has some interesting competitive advantages. For instance, most of its large and educated workforce speak English with minimal accents, so companies are comfortable using it as a main call center backbone. That’s a key driver of services growth, and infrastructure investment has helped unlock productivity growth.

The strategy: In Vietnam, we like FPT, an information technology services company taking market share from Indian IT services in particular, given its highly skilled, lower-cost labor. FPT operates an IT services university with campuses around the country, developing the next generation of professionals, so it’s vertically integrated with labor being its key asset.

We also like electronics retailer Mobile World and Vincom Retail, which owns and develops shopping malls. Vincom benefits from a growing middle class, and its malls are innovative growth businesses with churches, doctors, theaters, and concerts — helping malls become the center of community life.

In the Philippines, we like Ayala Land, a leading property developer and real estate operator. It’s well-positioned given its extensive land bank in locations poised to be unlocked by infrastructure buildout. And a growing middle class will drive demand for its housing products — it does residential development as well as hotels and malls.

There are points of debate about the growth stories in Vietnam and the Philippines. In Vietnam, weakness in the real estate sector has driven a liquidity crunch. Whether that persists and spreads is a debate, but we don’t think it will. The Philippines has current account and fiscal deficits and there are concerns over rising inflation. However, we think higher tourism activity and retrenchment in commodity prices like oil will help the current account deficit, and that inflation has peaked.

Direct Private Markets

The idea: We see a compelling opportunity to invest directly in private markets, combining venture capital, private equity and private credit. We recently launched a fund for our qualified clients to access private markets more efficiently. Investing directly aims to gain exposure to each portfolio company’s fundamentals while attempting to remove systematic market risk from the portfolio. While public market exposure is beneficial, it exposes you more to the markets’ animal spirits and potential volatility. In addition, we want to add diversification while keeping risk about the same due to the lower correlations of the asset classes. Historically, gaining direct access to private markets was challenging partly because of high minimums, access to good managers, and operational inefficiencies.

The strategy: In venture capital, many start-ups and early-stage companies had abundant capital coming their way when interest rates were lower. Now that we have higher interest rates, venture capital fund managers will be more discerning in allocating capital. Portfolio companies must hit specific benchmarks to receive follow-up investments. For investors, this creates an opportunity for those who use managers with a strict due diligence process as valuations have come back in.

On the private equity side, we’re looking at more seasoned managers who have succeeded through multiple market cycles. You want someone who understands how to work with companies successfully through multiple interest-rate environments.

For public market exposure, we run exchange-traded fund models. The risk parameters of a portfolio stay consistent when you add private market exposure since the risk from private markets has a low correlation with the rest of the portfolio. We are comfortable adding up to 10% exposure in client portfolios depending on a client’s goals, timing and risk. Due to the nature of these markets, this is a longer-term investment with a 10-year time frame. The fund uses a drawdown investment strategy, so there is better control over the timing of the investments since managers aren’t at the whims of capital flowing in and out of a fund quarterly.