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Passive Income Investments and Ideas - Including Investments Outside of the Stock Market

JP Villamarin, Senior Investment Analyst at Intercontinental, was recently quoted in this Forbes article called “How To Invest $1 Million In 2021 – Without The Stock Market”, and wrote this blog post as a follow-up piece with his full thoughts:

At Intercontinental Wealth Advisors, our current 12-month horizon investment positioning stems from the expectation of an inflation-benign global re-acceleration. The normalization of economic activity and the significant amount of liquidity that was injected in the global economy from monetary and fiscal stimuli provide very strong roots for business earnings recovery and risk-on sentiment. Recently challenged to consider our main investment ideas away from equities, we refreshed our macro framework that feed our views.

Our income investment ideas are the result of a current environment with three clear characteristics: 1) Low interest rates in the US, and developed markets for several years, 2) Spreads in USD, non-USD IG, and in the highest credit tiers of HY are back to pre-COVID-19 levels after massive monetary support from Central Banks 3) The risks of higher inflation expectations and potential upward moves in real rates are negatively asymmetric. 

Considering the hypothetical exercise of investing $1 million without the stock market still allows for investments in private offerings, then our default recommendation would favor the following opportunistic strategies: 1) Participation in Secondary funds[1] that allocate to growth companies in order to benefit from attractive net asset valuation discounts, 2) Distressed debt for control in US and European companies undergoing restructuring, 3) Opportunistic real estate with exposure to assets in the hotel and entertainment industry, and 4) Private credit, particularly on cash-flow oriented first lien strategies that can currently demand attractive spreads to LIBOR at conservative Loan to Value and interest coverage levels.

Apart from those peculiar private offering strategies, a macro framework of global re-acceleration in a benign inflation environment makes the following investments very attractive:

  1. Real Estate and REITs: Real Estate offers many attractive asset classes: Core Real Estate funds with exposure to multifamily and industrial assets in growing secondary cities have great demand fundamentals, but also the ability to obtain extremely cheap 10y + interest only mortgages, leading to healthy and attractive yield balances. If we could hand pick and construct a fund, it would have a barbell risk allocation which would include Class A multifamily properties in cities with population growth, industrial assets, some farmland[2] and more risky entertainment and hotel properties. Multifamily is the most stable real estate asset class, Industrial assets are benefitting from the growth of e-commerce and on the other hand hotel asset valuations still partially reflect the significant activity deceleration the industry faced due to global lockdowns. 
  2. Core Real Assets: Apart from core real estate, core infrastructure[3] (such as solar panels, power plants, railways, wind turbines, etc.) offers excellent yields with very solid structural protections for the value of assets. Both public and private funds from Brookfield are excellent examples.
  3. Cyclical Commodities: Cyclical commodities are also an attractive option, especially metals that do well when global growth is accelerating (China’s growth is imperative for this theme) but also benefit from the solid fundamental demand from batteries and chips: Base metals like Nickel, Aluminum, and Copper, and some other minor metals like Silicon. There is a big opportunity in actively playing the futures market of these commodities.
  4. Structured Notes: Structured Notes with principal downside protection: In the expected environment of higher volatility but low recession probabilities, these vehicles are an attractive way to get high yields. For instance, a one-year structured note on a couple of tech names, with 30% to 40% downside protection, could easily provide higher yields than what is now obtained from the US Corp HY index.
  5. First Lien Floating Loans: Both assets-backed loans from COVID-hit assets (such as commercial real estate, aviation assets) and cash-flow oriented first lien loans from middle market companies, currently offer attractive carry with interesting spreads to LIBOR.

Unusual times warrant unusual solutions. At Intercontinental Wealth Advisors, we continuously explore the investment arena to find opportunities with attractive positive asymmetric return profiles. Global re-acceleration, fueled by a vaccine driven recovery and sustainable policy commitments, renders a strong view of risk assets. It is as important today, as it is always, to find investment allocations that limit the sensibility to the structural risks that are growing in the market. Do not hesitate to contact us to find out more about how we are investing in the aforementioned asset classes. 

Sincerely,
JP Villamarin, CFA, CAIA
Senior Investment Analyst at Intercontinental Wealth Advisors

[1] Secondary funds in private equity are those that purchase LP participation in old vintage funds from existing LPs that are seeking to sell their participation.
[2] Farmland is an interesting play because it is an asset class that offers an attractive carry with inflation protection capabilities.
[3] Core infrastructure assets cover everything from electricity generation to transportation assets.