Finding Value Globally Across Asset Classes May 24, 2017 by Robert Huebscher Jae S. Yoon, CFA, is the chief investment officer and a portfolio manager at New York Life Investment Management LLC (NYLIM). Mr. Yoon partners with the portfolio teams at NYLIM s independent investment boutiques to ensure that investment processes and results align with client expectations. He also oversees NYLIM s Strategic Asset Allocation and Solutions (SAS) group which manages asset allocation portfolios for retail and institutional clients. Mr. Yoon is a graduate of Cornell University, where he earned a Master's degree in operations research and a Bachelor's degree in electrical engineering. Jae S. Yoon I spoke with Jae on April 27 at the Morningstar Investment Conference. What is your role at New York Life Investment Management and what is your strategic focus for the advisory market? I serve as the Chief Investment Officer of New York Life Investment Management, also known as NYLIM, which oversees approximately $293 billion in assets under management (as of 3/31/17). NYLIM is the global asset management arm of our parent company New York Life. At NYLIM, we offer investors access to independent global investment boutiques with specialties in areas including fixed income, equities, alternatives and liquid alternatives, sustainable and responsible investing (SRI) and asset allocation. In my role as CIO, I chair the NYLIM Investment Governance Committee and maintain oversight of investment processes and results across our organization. Additionally, I oversee the Strategic Asset Allocation and Solutions group which manages over $10 billion in asset allocation portfolios. My team and I also provide macroeconomic market research and insights for New York Life, MainStay Investments and our investors. I d like to get your take on valuations in the various asset classes that you follow. But before I do that, I want to get your general take on the global economy and in particular, the risk of recession in the US. We are in a global economic recovery led by the U.S. It has been a long economic recovery by historical standards but we see little chance of recession this year or next. Fiscal stimulus may extend Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.
the length of the recovery this time around. The recovery underway is producing profit growth. As a result we are neutral-to-positively disposed to risky assets around the world. Valuations reflect low inflation and an outlook of economic growth but they are uneven. U.S. equities are clearly on the richer side, followed by European equities and the Emerging Markets, which are the cheapest from a valuation perspective, in our view. Fiscal stimulus is a wild card. From a valuation perspective, the market may have gotten a little ahead of itself. There are differences in the economic backdrop President Reagan encountered versus the one President Trump is operating in. These differences such as the levels of inflation and unemployment - may not be getting the respect they deserve. Also, everyone expects things to happen faster these days but policy-making is still cumbersome as we ve recently seen. Despite these fine points, we believe the efforts underway to stimulate the economy will most likely provide further growth in this expansion but we are still in the later innings of the ballgame. Hopefully, it will go into extra innings. You wrote about a week ago that the Trump reflation trade may have lost some of its momentum, but that was before the market rallied this week following the results of the French primary election. Very few analysts believe that U.S. equities are undervalued or even fairly valued, but of course, most of those analysts have been wrong for the last five years. Where do you see value in U.S. equities? Equity markets around the world certainly rallied on fading political uncertainty in Europe. Within U.S. equities, we like commodity and energy-related sectors. We think oil prices will soon stabilize and then re-enter the $50 to $60 per barrel range. We think we will finish up the year around $60. As for risks worth watching, OPEC has some sway in the final outcome and its production requires ongoing monitoring. Another area we like is technology which may benefit from forthcoming tax reform and an upturn in capital spending now that corporate profits are growing again and CEO confidence is elevated. There are a lot of global linkages, so policies that impact trade, student visas, or the ease of entry for educated foreign citizens are among topics to watch. Revisiting the Trump reflation trade, we do think some version of the administration s plans on deregulation, tax reform and infrastructure will happen in late 2017 into 2018. But it may be hard to satisfy expectations. Modest corrections are hard to predict but do tend to occur a few times a year. European equities are cheaper than those in the U.S. based on most valuation measures. Given the policy uncertainty in Europe, how much capital should advisors commit to European equities? Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.
As asset allocators, we are moving toward neutral on Europe. We were underweight before the elections and began looking for opportunities to scale up on weakness heading into the French election because we thought the asset class was oversold. We have been adding to our position since while keeping in mind our turnover restraints. As we look forward, somewhere in 2017 going into 2018, we will probably increase our exposure to Europe further if a multi-year expansion with slower growth continues to look likely. Over time, Europe s geopolitical risk is likely to fade further. We have to watch the Brexit. We have to watch what happens in the German election, which we think is less of a risk than the case of France, and then maybe the referendum in Italy and its banking sector. Ultimately, Europe can t be left behind. You mentioned earlier that emerging market valuations are cheap and you like those better than you do those in Europe. Which emerging markets do you particularly favor? We asset allocate into emerging broadly. However, we like Eastern Europe, Asia, and selective emerging countries with commodity exposure. With the intricacies in the emerging markets, we don t look at individual countries and allocate in and out. We do focus on Russia and Brazil for commodity exposure, and Asia and Eastern Europe for demographic and export-based economic exposure. We broadly like emerging markets. But it is a longer term, strategic view. We ve actually seen emerging markets underperform on a relative basis over the last eight years. Globalization is taking one step back given the U.S. administration s views. However, over the next decade I d be long globalization. The 10-year Treasury yield is approximately 2.3%, near the lower end of where it s been this year. The consensus is that the bond bull market is over and that long-term investors should brace for a secular rise in rates. Are you in that camp? Yes. Today, with a little bit of delay in this reflation trade and the U.S. GDP expected to come in higher than the IMF s prediction of 2.3% (we expect 2.5% to 2.8%), a 10-year yield of 2.6% to 2.8% at the end of the year seems more likely. Reflation is here, but it has taken a pause. Investors should also brace for more volatility. If you look historically, bond yields since the 1950s rose from today s levels to 18% and then back down. At the turning points, it normally gets volatile. Although we have a base case view, we do recognize that anything is possible. Geopolitical and other factors could change at any time. One thing we do as investors is maintain inherent flexibility in our investments by allocating to what we call unconstrained bonds. In doing so, we give the manager flexibility to navigate the market s opportunities and volatility. High-yield spreads have tightened and default rates are fairly low, which led to some strong performance for junk bonds. Do you expect that to continue? The simple answer is no. I ll explain. Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.
If you take the high-yield market today, and remove the most distressed bonds, which include a fair number of energy credits, the rest of the market has the lowest spreads since 2007. Could spreads remain tight or get even tighter? Sure. As rates head up, this is possible for a time. But more likely the period of strong performance has already occurred. Given where spreads are today and how far along we are into the economic expansion, we re actually repositioning at the margin into a low-volatility, high-yield ETF we developed. The IQ S&P High Yield Low Volatility Bond ETF (HYLV) is a factor-based smart beta ETF that attempts to substantially reduce volatility without overtly forgoing returns. It does this by seeking to eliminate the riskiest credits. What are the key issues advisors should consider when they are thinking about their clients with long-term horizons? We have been working on a concept we like to call the science behind building better portfolios. What we are doing as asset allocators within our team and within NYLIM is blending our actively managed funds with ETFs. We use solution-based, factor-based ETFs to veer towards a targeted profile, reduce volatility and increase diversification. For example, we created the high-yield, low-volatility solution we touched on earlier. There are many low volatility equity solutions. But this is the first low-volatility, high-yield solution. We have also created the IQ Enhanced Core Plus Bond U.S. ETF (AGGP), a momentum-based fixedincome core-plus solution. The strategy can have exposures in high yield and emerging market debt, in addition to core bonds. The alpha generation comes from momentum and it is a factor-based, systematic solution. It can be used to augment the alpha generated by active credit specialists. Why did we develop AGGP and include it in our portfolio? It s a different alpha generator. Everything has its cycles. A lot of people ask us, Does momentum work in fixed income? So far so good. We have even seen another manager enter the space. Imitation is the sincerest form of flattery. Before considering an investment in the Fund, you should understand that you could lose money. The opinions expressed are those of New York Life Investments as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass or that past performance is indicative of future performance. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. For more information about MainStay Funds, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing. MainStay Investments is a registered service mark and name under which New York Life Investment Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.
Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds are managed by New York Life Investment Management LLC, and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC. Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.