Morgan Creek Capital CEO and CIO Mark Yusko told advisors not to expect any significant upside breakout for equities between now and 2021 and suggested they were brainwashed by a condition he called "Bogle-zation."
The head of the alternative investment company told attendees at the third annual Innovative Alternative Strategies conference in Denver this morning that without alternatives they would have no chance of achieving the returns clients expect.
Advisors are confronted with the 0%, 2%, 5% conundrum, Yusko said, pointing out that these were the best returns advisors could expect from cash, bonds and stocks, respectively. And he considers a 5% annual rate of return for equities over the next nine years to be highly unlikely. Any way an advisor allocates client funds with returns ranging from 0% to 5% doesn't get you far beyond 3.8% or 4% a year. Yusko called it the New Abnormal.
"Since 1999, the return on stocks [meaning the S&P 500] is zero," Yusko said, adding that he expects the same over the next eight to nine years. "There is a technical term for it. That sucks."
Doing the same thing over and over for year after year and expecting a different result in the definition of insanity, he added. "We know that stocks always beat gold except for the last 20 and 30 and 40 years. Stocks are up 4% for the last year and minus 2% a year for the last 5 years.""
Why will equities pause until 2021 and how can he be so precise? Well, demographics are destiny. At that point, the ratio of 40 to 49 year olds will start once again to surpass the number of 60 to 69 year olds in the population. The last time that happened was in 1980 and a 19-year bull market ensued. In 2021, the echo boomers will start turning 40.
Yusko defended the high fees associated with hedge funds and private equity. "More money was lost in Enron than in all hedge funds through history," he noted. People may howl about Bernard Madoff, but Madoff had "no hedges and no funds," except those he looted.
Advisors may have been brainwashed, according to Yusko. Everyone "in this room suffers from a condition I call Bogle-zation. Just watch out for the fees and you'll be fine."
Of course, Bogle and many others probably would think investing with alternative managers who charge 2% to 3% and take a share of the profits in a low-return environment is the definition of insanity.
Yusko believes that hedge funds and private equity outperformed over the last 20 years "and they will over the next 20 years. Why? "Because they attract the best brains." In contrast, even a great stock picker like Warren Buffett made a modest 4.5% over the last decade.
Citing the endowment model, Yusko said there is a reason why Yale has 60% of its endowment assets in private equity and real assets. Private equity possesses an illiquidity premium that Yusko believes can enable returns in the 15% area. He also favors venture capital, which is approaching a propitious inflection point in its historical 14-year cycle.
Asked about the heavy debt loads many private equity firms pile on companies after purchasing them, Yusko said that many of the agribusinesses he is investing in in nations ranging from China to Uruguay have very little debt, unlike the big leveraged buyouts in America. Yusko also favors venture capital at the present, saying that it is at the propitious inflection point of its historical 14-year cycle.