SPECIALTY ASSET MANAGEMENT OUTLOOK

Navigating Uncertainty with Specialty Assets

The winds of change blew steadily throughout 2016, bringing unexpected events which will influence the U.S. and world economy in the year ahead and give pause to investors seeking both stability and opportunity. First, in June, on the strength of a populist movement, Britain stunned the world by voting itself out of the European Union, and in November, the election of Donald Trump to the U.S. presidency concluded a year of divisive politics. While in 2016 investors maneuvered in anticipation of change, in 2017 change is here.

During shifting times such as these, we turn to what is foundational. Specialty assets, by their very nature, offer the significant advantage of broadening portfolio diversification while diluting market influence. Investments in real assets such as farm and ranch land, timberland and commercial real estate are independent of most of the factors that cause market volatility and can be an effective hedge against inflation. Patient investors can see consistent performance through market shifts as they reap the potential benefits of illiquidity.

As we make our way through 2017, active management of assets in this class will be key as particular changes brought about by a new administration and other developments on the world stage materialize. Careful stewardship of specialty assets can offer opportunities to maximize value while mitigating unfavorable impacts.

In light of the atmosphere of change, we begin 2017 with optimism for commercial real estate as well as oil and gas investments. We see a potential advantageous entry point for timberland investments developing and believe the long-term fundamental benefits of farmland ownership remain sound. In addition, persistent concerns regarding the impact of regulation, taxes and employer mandates on private business may be answered in the short term. Our optimism extends to the overall U.S. economy, which continues to lead the world and will serve as a springboard for the specialty asset class to take advantage of a growing global population and emerging economies worldwide.

Oil and Gas

Crude oil prices have rebounded well from the lows experienced in 2016 and recent agreements by members of OPEC (Organization of the Petroleum Exporting Countries) — as well as several non-OPEC producers — to cut production may spur oil prices even higher in 2017. In the U.S., crude oil production continues to decline, but producers are profitably developing at Permian Basin in Texas and STACK (Sooner Trend oil field, Anadarko basin, Canadian and Kingfisher counties) in Oklahoma.

Farm and Ranch Land

The price of farmland continued to trend back to normalcy in 2016 and should remain on that path in the year ahead as speculators exit and a more traditional supply-demand point of view returns to the forefront. 2016 was the 4th consecutive year of record crop production, creating all-time high surplus inventories and driving down commodity prices. Yet, as a long-term holding, a growing, hungry population coupled with finite supply make farmland an important fundamental in a broad portfolio that is subject to disciplined management.

Timberland

Timberland investments were slow to recover in 2016, as there were reduced acquisitions by large, institutional investors. Yet, the optionality offered by timberland — the option to harvest trees during favorable market conditions or allow the timber to grow and amass inventory during market downturns — can be significantly advantageous during times of flux when change is afoot but has not fully materialized. Additionally, timber prices should improve in light of the forecasted recovery for housing starts and a shift to a buyer's market.

Commercial Real Estate

We expect commercial real estate to perform well in 2017 due to projected growth in the Gross Domestic Product (GDP), a healthy job market, consumer optimism and low (albeit rising) interest rates. A flow of domestic institutional and offshore capital emphasizing direct investment in U.S. real estate supports our view. Selectivity will be key and skilled investors and investment managers must look carefully at geographic areas, property type and other factors to maximize value.

Private Business

In light of the 2016 election, 2017 could be the year that private businesses see a dial-back in regulations, tax codes and employee mandates that have presented them with headwinds in recent years, driving down profitability and acquisition prices. A healthier consumer and business climate, along with continued developments in technology, should spur businesses to invest in research and development and infuse capital, while also encouraging start-ups. The IPO climate was slow in 2016 and a seller's market is still expected in 2017.

 

The Specialty Asset Management 2017 Viewpoint is designed to provide general information about economics, asset classes, ideas and strategies. It is for discussion purposes only since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.

Past performance is no guarantee of future results.

Nonfinacial 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. 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. Client eligibility may apply.

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

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