Yield Seeking Investors Will Provide A Pocket of Opportunity
In last week’s Market Update, we discussed the Fed cut and low yields. We wrote about the low and flat bond yield curve and low yields on the S&P 500, which have driven investors to stocks that have paid an attractive, reliable and increasing dividend. We also introduced the alternatives asset class; another area that we think will benefit from the current yield environment. The three main asset classes are: stocks, bonds and cash; alternative assets are everything else, such as private equity, private credit and private real estate.
Investors have been flocking to this asset class, which has benefited two giants in this space, The Blackstone Group (Ticker: BX) and The Carlyle Group (Ticker CG). Year-to-date these stocks have increased tremendously, outpacing the S&P 500 by more than 50%.
According to Bloomberg, “Managers of publicly traded private equity firms are raising more funds in 2019 — after 2018 proved modest vs. the record new funds raised the prior year — supporting further growth in management fees.” This has helped increase the operating income of these companies, which has translated to higher stock prices. The trend is expected to continue for another few years as investors move to these asset classes to find a decent yield.
Another tailwind to BX and CG is that they have changed their business structure from a limited partnership to a corporation (CG has announced but won’t be effective until January 2020). As a limited partnership, many large investors like pensions and endowments were not able to invest in BX or CG because the firm provided a K-1 statement. However, with the structure change to a corporation, these large investors will be able to purchase these stocks, which will drive the demand higher.
An additional benefit from the structure change is that as a corporation, BX and CG are now eligible to be included in major stock indexes. This will drive more demand for the stocks as Index ETF providers will have to purchase the stocks to track the index.
As the market environment changes, we want to be able to take advantage of the opportunities. To learn more about current market trends, watch Robert Luna, Surevest CEO & Chief Investment Strategist on Making Money with Charles Payne on Fox Business at 11:00 am PST.
Disclosure: The Blackstone Group (Ticker: BX) and The Carlyle Group (Ticker: CG) are owned by some Surevest clients and employees. This is not a recommendation to buy these stocks. Consult with your financial advisor before making any investment decisions.