Beacon Pointe Headquarters hosted its 9th Annual Investment Forum at Big Canyon Country Club in Newport Beach, CA – introducing three speakers who shared exciting presentations. The first presentation focused on positively disruptive advances within the bio and life sciences fields, and the second combined an overview of the macroeconomic environment we find ourselves in as we enter into the new decade of 2020 and the critical role alternative investments play in the current investment landscape. Key themes and takeaways from of Beacon Pointe’s featured guest speaker presentations are summarized below.
The first presentation was given by Eli Casdin, Founder and Chief Investment Officer of Casdin Capital LLC, an investment firm focused on disruptive businesses. Mr. Casdin’s presentation was entitled ‘Genetics and Positively Disruptive Life Science Technologies’ in which he presented on the different investment opportunities and advancements occurring in the Life Sciences sector. Mr. Casdin spoke to the data-driven and technological aspects that impact life sciences, and while there are near-term headwinds, they will not stop the long-term potential of these investments and their impact on society.
Life Sciences as a data-driven opportunity set.
Mr. Casdin began his presentation by asking those in attendance if they knew someone who had been affected by diseases such as cancer or Alzheimer’s. After nearly every hand in the 200+ person audience was raised, he stated that the reason these diseases haven’t been cured isn’t because the problem is unsolvable, but because we don’t yet have enough data.
The cost and time to analyze data surrounding many of these diseases have both dropped precipitously in the past two decades. In 2001, it would take 3-4 years and about $300 million to analyze a human genome. In 2018, it could be done in one day for around a thousand dollars. Within the next five years, it is expected that genomic data will be the largest data set in the world, surpassing the “Facebooks” and “Googles” of the world. Genomic sequencing has grown to be an industry with $4.3 billion in annual revenue. This data is being applied to molecular diagnostics to not just treat diseases at the molecular level, but also screen for them before someone gets them. The revenue from molecular and next generation diagnostics has soared to an expected $13 billion in 2020.
All of this data has opened up an industry known as precision medicine, where a drug can be targeted precisely to how a disease is attacking each individual’s biology. The efficacy of this type of treatment increases the effectiveness of these medicines by three-fold; 32% of drugs that have been approved in the past decade are precision medicines, ones that are specifically tailored to the individual.
Then, Mr. Casdin pointed out, this isn’t just a human health story. Disruptive advances are changing the chemical and agricultural industries as well.
Near-term headwinds won’t stop the long-term momentum and disruptive forces in Life Sciences.
Mr. Casdin spoke to the fact that while many people have access to the best healthcare in the world, a large portion of the United States (U.S.) population isn’t receiving the same quality of care at an equal rate. There is momentum for that to change.
Healthcare represents 18% of gross domestic product (GDP) in the U.S., and healthcare spending is growing faster than GDP. That is especially surprising given that many people do not have access to the healthcare system. Premiums, deductibles and copayments have also been increasing more rapidly than wages.
Mr. Casdin stated the known fact that Americans have one or more chronic diseases. Chronic illnesses account for 86% of all healthcare-related spending. A great deal of that care isn’t leading to better outcomes, and prescription drugs are only 10% of that cost. Free market competition will do a great deal to solve the problem of increasing prices in pharmaceutical medicines. However, hospital stays and outpatient care account for 46% of healthcare spending. Mr. Casdin noted that frequently, hospitalization and outpatient care occurs because previous care has been mismanaged. Healthcare costs can be lowered if we are able to increase the use and efficacy of drugs, institute a proactive approach to healthcare, and reduce hospital stays.
Exposure to Life Sciences can provide growth in a portfolio.
In the next decade, Mr. Casdin expects that China will become a much larger player in the Life Sciences sector in terms of innovation and scale. Currently, China is not at the same level of innovation and research as we are here in the U.S., but their speed of decision making is faster than ours and their regulatory environment is more encouraging of innovation. China will definitely be a growing part of the Life Sciences arena and pharmaceutical production in the coming years.
In the end, Mr. Casdin emphasized three key points from his presentation. One, that Life Science is a technology-driven information investment story. Two, near-term headwinds are real but not strong enough to dislodge the long-term potential of these investments. And lastly, that portfolios need exposure in order to grow.
To view Mr. Casdin’s full presentation: CLICK HERE.
Market Outlook – 2020
The forum then transitioned from Mr. Casdin’s enlightening presentation about the Life Sciences sector to a look ahead at the markets in 2020.
Michael Dow, CFA, CPA, Chief Investment Officer of Beacon Pointe, took to the podium to discuss Beacon Pointe’s 2020 investment outlook. He outlined how macroeconomics inform our firm’s investment process, identified three investment themes expected to define opportunities (and risks) in 2020, described our outlook on the economy and how those are both used to articulate Beacon Pointe’s market and investment outlooks.
- Macroeconomic data is the raw material for how we feel about capital asset prices. The goal is to determine which markets are rich, and which are cheap. More specifically, which assets should you be tilting toward and to which should you be reducing exposure.
- Financial conditions, monetary policy, economic growth and recession probabilities all factor into the decisions we make on behalf of our client and their portfolios.
- Asset allocation is the next step where we determine which opportunities are rich or cheap in order to determine the appropriate asset classes and weights for each portfolio.
- Those weights are then populated with best-in-class investment managers. The Beacon Pointe research process has been refined over two decades to identify these types of managers.
- Lower public equity risk premium – The equity risk premium is the excess return over the risk-free rate provided by investing in equities. Given the excellent stock market returns of the past decade and especially in 2019, we should expect lower future returns. This can seem counterintuitive, but when prices go down, we should expect them to rebound, and when prices increase, we should expect them to be muted over the next period.
- At 3.9%, the equity risk premium is near historic lows.
- Lower public fixed income yields – We are not just at multi-year or even generational lows on treasury yields. We are at multi-century lows.
- The yield on the 10-year treasury peaked at almost 14% in the early 80’s. The 220-year average of U.S. treasury yields is 4.82%. In the last four years, the average is 2.32% and the most recent yield is 1.60%.
- Higher volatility in public markets – From 2014 until 2018, volatility in capital markets declined dramatically through quantitative easing. The Fed stopped Quantitative Easing (QE) officially in 2018 and volatility has increased. Beacon Pointe has created a capital market volatility index comprised of volatilities of equity prices, currencies, credit spreads, and commodities. Not only is capital market volatility increasing, the volatility of that volatility is increasing.
- Financial Conditions Index – This is the data the Federal Reserve looks at to determine if the economy is expected to be slowing or growing three or four quarters ahead. Financial conditions are easing which means a better outlook for the economy.
- The Federal Reserve to the Rescue – If necessary, the Federal Reserve will pump liquidity into the economy if it appears that the equity market is faltering.
- GDP and Probability of Recession – The Beacon Pointe Macroeconomic Committee believes GDP will be slightly higher than the consensus and that the probability of recession is lower than the consensus. We do not foresee a recession in the first half of 2020.
Then, the presentation transitioned from Mr. Dow’s market outlook to alternative investments and the roles they play in the current market environment, in which Derek Newcomer, CFA, CAIA, Director of Alternative Investment Research at Beacon Pointe, discussed investment solutions given the current capital market environment. He also provided details on the research process Beacon Pointe employs to identify these types of investment opportunities.
Benefits of Alternative Investments
- Enhanced Returns – Increase the return potential of the portfolio.
- Risk Reduction – Knowing we are entering a period of higher volatility; alternatives can smooth out the return pattern in the overall portfolio as performance is usually viewed over long-term durations due to longer hold periods.
- Diversification – Deriving returns that are less dependent on what is happening in the broader economy or capital markets.
- Inflation Protection – Some alternatives help to preserve the buying power of invested capital.
- Historically, a 70:30 portfolio with alternatives has generated a return that is 50 basis points higher than a 70:30 portfolio without alternatives. The risk adjusted return of the portfolio with alternatives is higher as well.
- Because the equity risk premium and yields are both low, the forward-looking expected return of a 70:30 portfolio without alternatives is muted with an expectation of 5.5%. Including a diversified basket of alternatives in the allocation increases that expectation to 6.0% – also with a higher risk adjusted return.
- Private Equity is investment in private businesses at attractive valuations – Over a ten-year period, the public equity market has returned 13.2% with volatility (risk) of 15.7%. In comparison, private equity has returned 14.3% with volatility of 9.9%.
- Private Credit is asset-backed or cash flow lending to private businesses – Over a ten-year period, U.S. public credit has returned 6.5% with volatility of 10.0%. By comparison, U.S. private credit has returned 10.6% with volatility of 3.4%.
- Hedged Equity is a conservative equity solution that provides downside protection. From 2003-2019, it has captured only 52.3% of the equity market downside. The worst quarter for the strategy over that period was a negative 6.3%. By comparison, the worst quarter for the broader market was negative 21.9%.
Given that alternative strategies are sometimes illiquid and require longer lock-up periods, we need to ensure that we are partnering with the right people and the right groups to steward our clients’ capital.
An important key is identifying alternative managers that have a repeatable process. Our due diligence process includes both quantitative and qualitative screens. There are 350-375 alternative managers that Beacon Pointe evaluates every year, with only six to eight managers passing our rigorous requirements to be added to Beacon Pointe’s Focus List of managers.
To view Mr. Dow and Mr. Newcomer’s full presentation: CLICK HERE.
Beacon Pointe’s Chief Investment Officer provides regular, quick market flashes on Twitter. To follow these updates, follow Michael Dow at @BeaconPointeCIO.
We had yet another year of brilliant topical speakers, and Beacon Pointe was honored to share the incredible knowledge and expertise of all three presenters, Mr. Casdin, Mr. Dow and Mr. Newcomer. Mr. Casdin provided an inside view of a burgeoning sector as Life Sciences continue to blossom. Mr. Dow was able to provide a full macroeconomic and market outlook for this upcoming year and beyond and share our firm’s investment philosophy and process. And, Mr. Newcomer discussed the options and opportunities that exist within alternative investments to navigate the existing market landscape.
To our clients that were able to attend the event in person, thank you for taking part in Beacon Pointe’s 9th Annual Investment Forum. For those who were unable to join us, we hope the information gathered here from our event is enlightening and can be applied to your everyday lives. From all of us at Beacon Pointe, thank you for putting your trust in us as your dedicated financial advisors and investment consultants.
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