Issue 31: 2016

Specialty Asset Management

Specialty Assets: Our Midyear Outlook

With 2016 market volatility expected to endure, investors continue to turn to tangible assets in a hunt for yield.

Photograph by Andy Ryan

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This year began with unusual volatility — a hangover from the difficult conditions at the end of last year — that has remained through the first half of 2016. In response, many investors continue to invest in specialty assets. These types of assets — commercial real estate, farmland, timberland and more — historically have offered these advantages: portfolio diversification outside of equity markets, a hedge against potential inflationary periods, and the opportunity to own something tangible and unique. Here’s our outlook for the second half of the year.

Commercial real estate, while subject to variances because of product type and geographic location, is anticipated to yield favorable results through 2016, with positive fundamentals and gradual price appreciation for assets. Sustained job and GDP growth in the recovering U.S. economy should drive the asset class, with the office and industrial subclasses likely to emerge as the most favorable investments.

The apartment subclass, meanwhile, may take a modest step back in the remainder of 2016, due to
an increase in completions and a correlated increase in vacancies.

Industrial real estate has the potential to benefit from the emerging demand for fulfillment centers, as consumers increasingly migrate to e-commerce, while absorption, construction and vacancy, which all quietly accelerated in 2015, should continue on a positive trend during the second half of 2016.

Timberland continues to benefit from the demands generated by population growth, improved housing markets, the robust and emerging pulp and paper market, and continued domestic and worldwide growth in renewable energy sources like biomass. We are seeing sustained interest from investors who have sufficient investment capital to achieve regional diversification (which can potentially reduce risk from adverse weather conditions or tree disease in one area) and who appreciate the appeal of the asset’s grow-it-or-sell-it “optionality.” (For more, see the “Timberland as a Sustainable Investment” pop-up box, below.)

TIMBERLAND AS A SUSTAINABLE INVESTMENTRead more
Timberland as a Sustainable Investment

Today, an increasing number of high-net-worth and institutional investors are attempting to promote their social and environmental values through their investment strategies. Timberland offers these investors an opportunity to pursue both an environmentally sensitive investment platform and a financial advantage. Forests and timberland, when managed using an environmental lens, can aid in the protection of air and water quality, drive carbon sequestration and provide a source of renewable energy. As an investment, timberland may, like other specialty assets, offer attractive risk-adjusted returns for portfolio diversification1 and help hedge against inflation.2

One potentially unique benefit of timberland is that investors can either sell it when market conditions are favorable or allow biological growth to continue when market conditions are adverse — options that serve to ease the pressures of market volatility. Simply put: You grow it until you sell it.

Doug Donnell, National Timberland Executive, Specialty Asset Management, U.S. Trust

1 Diversification does not ensure a profit or protect against loss in declining markets.

2 Forest Investment Associates Research, 2013. (Data collected 1960-2012.)

Photo: DNY59/Getty Images

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Nonfinancial Assets Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

 

 

Farmland is edging toward equilibrium after pendulum swings of recent years, and has potential to be a favorable long-term investment, given both the trend away from speculative pricing and the asset’s finite supply. In fact, we believe 2016 is a particularly appealing year for farmland investments due to conservative valuations and the possibility of excess supply from recent years diminishing due to more normal weather patterns. Additionally, demand for and consumption of crops are increasing by virtue of population growth, as well as growth in the per capita gross domestic product of emerging market countries.

In Response to market volatility, many investors continue to invest in
specialty assets.

Businesses engaged in, or supporting, the production of oil and natural gas will most likely continue to face challenges during the second half of the year, as the sector languishes under the cloud of low prices and volatility. Consumers and businesses in transportation, manufacturing and even timberland and farming have potential to benefit from low energy prices and the overall reduction in the health of oil and gas producers and energy companies. Oil and gas equipment manufacturers and other related companies will likely hinder the financial market in the second half, with no end in sight, at least for now.

Private business is likewise expected to continue to reflect the modest growth of the U.S. economy. We anticipate solid activity in mergers and acquisitions in 2016 as companies look to increase their speed to market by acquiring, rather than developing, new technologies. Strong deal flow is especially likely in the technology, healthcare and consumer product sectors, with cash or near-cash buyers gaining advantage with the anticipation of further increases in interest rates.

IMPORTANT INFORMATION

Projections made may not come to pass due to market conditions and fluctuations. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments.

Nonfinancial Assets Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

This year began with unusual volatility — a hangover from the difficult conditions at the end of last year — that has remained through the first half of 2016. In response, many investors continue to invest in specialty assets. These types of assets — commercial real estate, farmland, timberland and more — historically have offered these advantages: portfolio diversification outside of equity markets, a hedge against potential inflationary periods, and the opportunity to own something tangible and unique. Here’s our outlook for the second half of the year.

Commercial real estate, while subject to variances because of product type and geographic location, is anticipated to yield favorable results through 2016, with positive fundamentals and gradual price appreciation for assets. Sustained job and GDP growth in the recovering U.S. economy should drive the asset class, with the office and industrial subclasses likely to emerge as the most favorable investments.

The apartment subclass, meanwhile, may take a modest step back in the remainder of 2016, due to
an increase in completions and a correlated increase in vacancies.

Industrial real estate has the potential to benefit from the emerging demand for fulfillment centers, as consumers increasingly migrate to e-commerce, while absorption, construction and vacancy, which all quietly accelerated in 2015, should continue on a positive trend during the second half of 2016.

Timberland continues to benefit from the demands generated by population growth, improved housing markets, the robust and emerging pulp and paper market, and continued domestic and worldwide growth in renewable energy sources like biomass. We are seeing sustained interest from investors who have sufficient investment capital to achieve regional diversification (which can potentially reduce risk from adverse weather conditions or tree disease in one area) and who appreciate the appeal of the asset’s grow-it-or-sell-it “optionality.” (For more, see the “Timberland as a Sustainable Investment” pop-up box, below.)

TIMBERLAND AS A SUSTAINABLE INVESTMENTRead more
Timberland as a Sustainable Investment

Today, an increasing number of high-net-worth and institutional investors are attempting to promote their social and environmental values through their investment strategies. Timberland offers these investors an opportunity to pursue both an environmentally sensitive investment platform and a financial advantage. Forests and timberland, when managed using an environmental lens, can aid in the protection of air and water quality, drive carbon sequestration and provide a source of renewable energy. As an investment, timberland may, like other specialty assets, offer attractive risk-adjusted returns for portfolio diversification1 and help hedge against inflation.2

One potentially unique benefit of timberland is that investors can either sell it when market conditions are favorable or allow biological growth to continue when market conditions are adverse — options that serve to ease the pressures of market volatility. Simply put: You grow it until you sell it.

Doug Donnell, National Timberland Executive, Specialty Asset Management, U.S. Trust

1 Diversification does not ensure a profit or protect against loss in declining markets.

2 Forest Investment Associates Research, 2013. (Data collected 1960-2012.)

Photo: DNY59/Getty Images

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Nonfinancial Assets Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

 

 

Farmland is edging toward equilibrium after pendulum swings of recent years, and has potential to be a favorable long-term investment, given both the trend away from speculative pricing and the asset’s finite supply. In fact, we believe 2016 is a particularly appealing year for farmland investments due to conservative valuations and the possibility of excess supply from recent years diminishing due to more normal weather patterns. Additionally, demand for and consumption of crops are increasing by virtue of population growth, as well as growth in the per capita gross domestic product of emerging market countries.

In Response to market volatility, many investors continue to invest in
specialty assets.

Businesses engaged in, or supporting, the production of oil and natural gas will most likely continue to face challenges during the second half of the year, as the sector languishes under the cloud of low prices and volatility. Consumers and businesses in transportation, manufacturing and even timberland and farming have potential to benefit from low energy prices and the overall reduction in the health of oil and gas producers and energy companies. Oil and gas equipment manufacturers and other related companies will likely hinder the financial market in the second half, with no end in sight, at least for now.

Private business is likewise expected to continue to reflect the modest growth of the U.S. economy. We anticipate solid activity in mergers and acquisitions in 2016 as companies look to increase their speed to market by acquiring, rather than developing, new technologies. Strong deal flow is especially likely in the technology, healthcare and consumer product sectors, with cash or near-cash buyers gaining advantage with the anticipation of further increases in interest rates.

IMPORTANT INFORMATION

Projections made may not come to pass due to market conditions and fluctuations. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments.

Nonfinancial Assets Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.