Third Quarter 2021

to “non-conventional investments.”  Some even suggest much of the allocation that has historically been dedicated to fixed income must now and in the future be directed to “Alternative Investments” to have any chance of reaching historically average returns.  To be clear, we’re all for maximizing returns by being open-minded to various options, but we’re cautious when the effort to maximize returns results in the inadvertent consequence of a change in the risk profile.

Alternative Investments is a generically labeled asset class that encompasses a wide variety of public and private market strategies.  The underlying holdings are often recognizable public market securities, which you may already own, but they are typically embedded within complex products or funds that usually are accompanied by higher fees, lower liquidity, and at times, subjective mark-to-market pricing.   Hedge funds, private equity, and real estate are recognizable examples of non-conventional investments that generally are considered Alternative Investments.  According to Pensions & Investments, global alternative assets under management currently exceed $10 trillion, and those balances are growing exponentially.  No wonder.  A representative sampling of the asset allocation targets of the largest wealth managers in the world shows “non-traditional” investments comprising a prominent 20-30% position.  As referenced earlier, the new Alternative Investments allocation comes mostly at the expense of former allocations to fixed income.  Yet, at NGA we have chosen another path.  Our lack of direct exposure reflects unfavorable past experiences, higher embedded costs, inherent conflicts of interest, and lock-up requirements that are inconsistent with the time horizon found to be acceptable to most of our clients.

For the more than 10 years since our inception, we have focused our investment selection process on the pillars of transparency, liquidity, and anti-complexity along with the old-fashioned notion that costs matter.  These principles have resonated with our clients and at least some portion of our growth to more than $1 billion in assets under our care is certainly attributable to clients embracing these maxims.  It’s not that we don’t recognize the allure of specialty segments like private equity, private debt, direct real estate, commodities, and infrastructure assets.  We would just prefer to participate through publicly traded assets.  We’ve done so for some time with direct investments in the major asset management firms who make a substantial amount of their living in this space.  Instead of investing in the fund or product, we would rather buy shares in the company that sells and makes profits from the funds and products being sold.   That said, if you look a little deeper inside our typical portfolio, you’ll see “Alternative Investment” representation, just not through the typical costly and opaque wrapper.  Like the old Prego spaghetti sauce tag line…”It’s in there!”

Several of the large cap companies in which we invest are using retained earnings to fund their own venture capital and private equity investments from within the packaging of the larger organization.  Commodity exposure into Lithium and precious metals is easily gained through direct ownership of publicly traded miners.  Participation in real estate is realized through certain publicly traded REITs active in development and real estate management.  Ownership of shares of companies operating ports, airports, pipelines, and toll roads constitutes commitments to infrastructure.  Our direct investments in micro-cap companies represent about as near to private equity-type opportunity as you can get within the public markets.  In the end, we would argue we don’t invest in the “black box”.  Instead, we invest in the light of day and own directly and less expensively the actual individual companies from inside the box.