Andrew Grant is the director of manager research and investment solutions at Los Angeles-based firm Kayne Anderson Rudnick (KAR). In his role, Grant oversees due diligence on third-party managers for KAR’s wealth advisory business, along with evaluating potential new asset classes and working with advisors to craft client messaging.
Russ Alan Prince: What specific sectors do you see high-quality, long-term opportunities in and why?
Andrew Grant: Right now, we’re encouraged by what we’re seeing in private credit. It’s not your traditional equity or fixed-income public market. Still, in our mind, private credit has seen strong returns over the past few years but has also experienced lower volatility relative to the rest of the market. We’re seeing a lot of people moving in that direction from an institutional standpoint.
Kayne’s “high quality” investment strategy has also led the firm to look for quality managers within that sector as well. Within private credit, we seek managers that have low loan-to-value ratios, no loan losses on their books and a strong track record in the field. When we find one that meets our benchmarks, and they have sponsors with significant cash behind them, such as private equity firms, to further increase the quality of these loans, we are comforted knowing that their ability to repay their loans is independent of what’s happening in other areas like banking or commercial real estate. We believe that those parties have cash on hand if any of their portfolio companies struggle with interest payments, which goes back to the standard of quality we look for across all sectors, private and public alike.
Prince: What is your market outlook for the remainder of the year? Do you envision a hard or soft landing?
Grant: I think we’re going to continue to see choppy markets for the rest of 2023. Soft landings are hard to achieve; hard landings are typically inevitable. The Fed is pegged to this belief that inflation must come down, and I don’t think we’re going to see it drop to a level that they’re happy with.
In our view, they’ve already gone too far with interest rates at this point. What happened in the banking sector effectively did some of the Fed’s work for them regarding interest rates and possibly needing to hike rates less. But ultimately, the Fed doesn’t want to repeat the mistake they’ve made by allowing inflation to creep back in.
I think it will be extremely hard for them to get back down to the 2% level. Three percent inflation may be the new 2%. It’s going to be very hard to get from current levels to 3% without there being some cracks in the labor market. The unemployment rate is undoubtedly going to creep higher. It’s unclear how much it will climb and how much of it can be picked up by GDP growth. Still, as investors, that’s where we have to say to ourselves, “We just have to concentrate on what we do best from an allocation standpoint,” and stay with those managers who’ve been able to weather these sorts of storms in the past.
Prince: How are you navigating key risks such as the debt ceiling standoff, the Fed’s decision-making, the banking crisis, etc., and just how fragile is the market overall?
Grant: We seem to have major inflection points cropping up on a quarterly basis. We’ve had to contend with interest rates, the issues within banking, the debt ceiling and concerns surrounding commercial real estate. Now, I think people might be underestimating what’s going to happen once the debt ceiling clears and the Treasury has to issue all of this debt they’ve been sitting on to refill the general account, to say nothing of what’s going to happen when the Fed starts quantitative tightening. I think we will see some noteworthy interest rate movements in the bond market.
We can’t predict whether the market is going to be up or down, but I believe we’re going to be choppy and sideways. We’ve seen a bit of a relief rally in select areas of technology, and AI has obviously caught a massive bid. But for the most part, the beginning of the year saw a low-quality rally along with a rally from a handful of stocks, so the market breadth is very narrow. As there haven’t been a lot of people following the big seven names in the S&P, I think market choppiness continues until a lot of these larger issues with the likes of real estate and interest rates pan out.
I think we’ll have this grind-it-out market environment that’s going to be difficult to penetrate unless you’re using active management. Our proprietary strategies and third-party managers may own some newsworthy companies that you hear about leading the rallies, but we may not own as large of a weighting compared to the index or benchmark. Instead, we seek to protect on the downside by sticking to our discipline of owning companies that are leaders in their space and exhibit strong earnings, profitability, barriers to entry and high switching costs, all the while avoiding chasing momentum.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
