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KKR Report: ‘The Uncomfortable Truth’ of Yield Yearn

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McVey

KKR released ‘The Uncomfortable Truth’ by Henry McVey, Head of Global Macro and Asset Allocation. The firm’s latest Insights report examines the intensifying yearn for yield by investors increasingly bumping up against “the uncomfortable truth” of declining interest rates amidst soaring fiscal deficits and bulging debt loads.

McVey says, “It is not business as usual in the capital markets. While we have high conviction that rates are likely to remain lower for longer, both debt issuance and deficits continue to soar across many areas of the private and public sectors. Such backdrop highlights the need to own more cash-flowing assets linked to nominal GDP, build more flexibility across mandates, and shorten duration where appropriate.”

McVey and his team outline the following conclusions for consideration in repositioning a portfolio to outperform without taking on undue risks in this new environment:
1. Beyond just central bank intervention creating downward pressure, aging demographics, excess capacity, and technological innovation are expected to continue to put a lid on interest rates with the overall global interest rate curve remaining low relative to historic levels.
2. Governments are trying to boost nominal GDP by holding down nominal interest rates. As such, investors should consider shortening portfolio duration and owning more collateralized assets linked to nominal GDP.
3. Holding nominal GDP above nominal interest rates also argues for investors to own some form of an overweight to longer duration Real Assets, especially those investments with upfront yield. Consistent with this view, Infrastructure remains one of KKR’s larger overweight positions in its target asset allocation.
4. We also favor Real Estate. Specifically, our call to arms is still to own Real Estate Equity via Opportunistic Real Estate for capital appreciation and B-piece Commercial Real Estate Credit to generate some outsized income. In general, Real Estate acts as a compelling diversifier in portfolios, as it not only provides cash flow but also has a distinct supply/demand cycle that is often separate from the broader economic environment.
5. We continue to advocate flexibility across mandates in the Fixed Income arena, Liquid Credit in particular. Given our view that the shift from monetary stimulus towards fiscal stimulus is likely to create periods of heightened uncertainty, we now heavily favor increasing flexibility across all the mandates that we oversee, including Actively Managed Opportunistic Credit.

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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