Real Assets Adviser

November 1, 2015: Vol. 2, Number 11

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From the Current Issue

Prices Facing New Influences: A trio of influences is materially affecting farm commodity prices

Agriculture’s performance can diverge from the rest of the economy because of a variety of factors. A recent example is the increased volatility in prices caused by weather affecting production. In the remainder of 2015, the weather could play an even larger role as El Niño strengthens and has the potential to erase the dampening effect that large global stockpiles have had on commodity prices since 2013. Amid this heightened volatility, it is helpful to examine several key influences that have led to important divergences between agricultural sector performance and prices versus the overall domestic economy and capital markets through time.

Risk & Reward: Should real estate investors shoot for bigger returns by taking on more risk at this stage in the cycle?

To get the right answer, you first have to ask the correct question. Today, investors are asking whether the commercial real estate market is at peak asset pricing or, more directly, whether asset prices can only go down from here. But shouldn’t we really be asking, “Is now the time in the market cycle to be taking on more risk in the pursuit of short-term gains?” Conventional wisdom today seems to be to prioritize maximizing returns at the expense of risk control. We believe, however, maintaining an equal focus on return potential and risk control will result in more favorable outcomes, especially in the core space. This conclusion is arrived at based on the following factors, one of which includes pricing levels:

The Case for Airports: Private airport investment took off in Europe in 1987 and has traveled from there

Airports are unusual investment vehicles. They are highly regulated property assets with characteristics of utilities, shopping malls and monopolies, at least in a local context. They operate in a relatively high-growth arena, with global air passenger demand forecast to grow at 5 percent a year for the foreseeable future, and with the number of passengers increasing by just less than twice the rate of the growth in real GDP. Their reason for existence is to provide access to airlines to land and takeoff safely, and they charge those airlines for the privilege. However, those very same airlines engorge and spew passengers in a flow to provide a captive market for a series of ancillary selling potentials, from car parking and coffee shops to duty-free sales and high-end luxury goods. After all, those passengers have to be given something to do while waiting for their flights. 

Time for Liquid Alternatives: Mutual funds provide everyday investors with the benefits of alternatives

The 35-year decline in interest rates has been a generational game changer. As rates have declined, people have been able to refinance their homes while corporations have been able to refinance their debt. This has helped to smooth out some of the bumps in the economy. However, with the Federal Reserve essentially unable to lower rates much further, economic cycles could be more pronounced going forward. For stock investors this means the markets could be more cyclical going forward. That is to say that market trends will be shorter in duration and potentially more volatile. For bond investors, that means that the 30-year bull market may be coming to an end. Thus, investors may want to complement their stock and bond holdings in their investment portfolios.

Carry That Weight: Mortgages in this lengthening cycle may grow increasingly prone to lax standards

The Beatles released their 11th studio album in the fall of 1969, and the 15th cut on that album, lasting a mere one minute and 37 seconds, began with the words, “You never give me your money. You only give me your funny paper.” I had to think of those words when I received a flyer in the mail from a Long Island mortgage company that trumpeted in drop-shadow type, “No Income is Back … No Kidding!!” (punctuation in the original), and gave three “Reasons To Go Stated Income”

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