In describing his strategy for investing in the current era of prolonged stagnant growth and persistent multi-pronged risk, David Rosenberg has lately been prone to using baseball metaphors. Me? I prefer sushi.
While explaining his "swinging for singles but not hiding in the dugout" investing strategy between bites of nigiri and maki at lunch this week, the Gluskin Sheff + Associates Inc. chief economist/strategist and I got talking about how, when we were younger, the notion of eating raw fish for anything but a frat-house initiation prank seemed both thoroughly unappetizing and patently ridiculous. "Give me a good slab of steak, big as my head" was pretty much our mutual mantra.
Mr. Rosenberg first experienced sushi at a client lunch shortly after he joined what was then Nesbitt Burns in 1995. He was more than a little reluctant, but his only other choice – going hungry – wasn't practical. So he sampled what was on the table – and found that those strange little foreign bites actually made quite a satisfying meal.
I couldn't help but see a parallel with our conversation about the markets. The old-fashioned, meat-and-potatoes markets on which we were raised are gone. Yet walking away from the table isn't an option. We're going to have to try some new things if we're going to succeed as investors in markets that have fed us slow growth and uncertainty for years – with more of the same still on the menu.
In a report Mr. Rosenberg published this summer, he said the current near-zero interest rates in government T-bills aren't merely a vexing problem for investor returns. They represent powerful evidence that (a) risk in financial markets remains high and (b) the economic outlook is "fragile." Bottom line, the low rates are a bet on deflation – an economic state that is a massive albatross for the stock market. (Don't believe me? I refer you to Japan – 1999 to present.)
On the one hand, this is not an environment that makes equities very attractive; it's an inherently risky asset class that looks even more precarious in the current conditions, and isn't offering much growth potential to justify the risk. In Mr. Rosenberg's baseball parlance, home runs are harder to come by – and swinging for the fences heightens your risk for some very costly strikeouts.
On the other hand, while essentially risk-free government bonds and T-bills are a safe place to hide, their returns are so puny that long-term investors simply can't afford to park their retirement savings there.
"With risk-free rates at or near 0 per cent, this is no time to run and hide," he said. "Understanding the environment we are in and actively engaging the markets and what they give us is the key to successful investing, and that is the case all the time."
And what are they giving us? Well, in Mr. Rosenberg's analogy, "singles" – smaller-scale successes that can more reliably deliver decent returns both when the market rallies and when it slumps.
In practical terms, what that means is income-generating assets. "In a deflationary environment where rates are at or near 0 per cent, it is not 'cash is king' as much as 'cash flow is king,'" he said.
"At some point – likely in the next secular bull market, which could still be years away – the income theme will grow stale and we shall see a return to aggressive growth and capital appreciation strategies," he wrote in the report. "For now, it is important to have exposure to income-generating strategies within the equity market or the alternatives space, and collect an economic rent as we wait for the inevitable transition to the next up-cycle."
And what would this kind of portfolio look like? Mr. Rosenberg has some ideas:
"Exposure to hedge funds that really hedge the risks";
"Exposure to asset classes that are at least halfway priced for a recessionary outcome, like corporate credit";
Exposure to income-generating assets of all types, including hybrid portfolios with low betas, [and] low but rising [dividend] payout ratios in companies with strong balance sheets and a history of generating stable cash flows."
Not exactly an old-school stock portfolio – but we have to get past our old biases and accept that markets are different, riskier, less predictable than they were before the financial crisis. It's time to try the sushi.
David Parkinson