by Ryan Parson, Colonial Funding Group, The Buyline, January, 2016
In a typical college level finance course, a professor would lecture about “flight to quality,” explaining the concept involved investors seeking safer assets rather than more risky ones and thus willing to forgo yield as a result. The professor would also explain that the safest of all investments were USA-backed assets such as a Treasury bonds or T-bills.
You don’t have to look very far today to see that Treasuries are paying a pretty paltry return. When you take inflation into consideration, you’re essentially losing money. Flight to quality is in actuality a “flight to loss.” Of course, there are reasons investors are willing to accept this drastic trade-off, primarily fear of loss (of principal).
With all the recent talk of the Fed tinkering with interest rates, coupled with concerns about whether or not a recession is coming, where does one turn for Flight to Quality in the world of alternative investments? More specifically, where do high net worth investors seek out quality in the face of all this uncertainty?
From the perspective of high net worth investors, Flight to Quality looks a little different than it does to other classes of investors.
They start by saying ‘no’ to investments in the traditional market and ‘yes’ to assets with a predictable return backed by something tangible, typically real estate related.
Why is having a real estate related asset considered to be flight to quality in the world of alternative investments? It boils down to the fact that as market value changes, as interest rates go up and down, the physical pieces of real estate you own still have value regardless of fluctuating markets. The value of that investment is significantly influenced by the fact that investors can control what happens with their assets. For example, if demand to own housing in a particular market is greater than rents, the investor may choose to sell their property with seller financing, versus renting, in order to achieve a higher return.
As overall economic unrest continues, the desire to have an asset you can control becomes significantly more important. Real estate provides Flight to Quality as investors do the best they can to bulletproof their portfolios from the barrage of uncertainties and otherwise uncomfortable conditions.
If you have a 401k plan through your employer, you may or may not be keeping an eye on results on a regular basis, but if you even remotely pay attention to it, you certainly know that there is a lot of volatility today. Consequently you see your portfolio value go up and down. The frustrating part is that you have zero control over these fluctuations. Not surprisingly, part of the drive behind Flight to Quality is a thirst for more control.
What’s your strategy for achieving Quality – and Control – in your portfolio?
Per Dave Franecki, Fund Manager of Capstone Capital USA …………….
When one is buying investment quality performing notes, with a very strong Investment To Value(ITV), your portfolio is safe and secure. What is a a good # to aim for? Any purchase below 70% ITV and 70 LTV is a reasonably safe position. Even if the payor “walks”, there is plenty of protection with this amount of equity spread. In this unsure times, the return of capital is much more important that the return on capital. A good value buy take into account the 6 Factors that affect a notes value. Caution is the today’s word of wisdom.