We just returned from the Morningstar Investment Conference in Chicago today and wanted to share some thoughts from the conference.   The most interesting discussions focused on what foreign investors are doing now because of negative interest rates around the globe.

Many foreign investors (especially foreign insurance companies) are looking to buy higher yielding US investments.  One manager mentioned that they are seeing foreigners buying US municipal bonds (keep in mind; they get no tax benefit from buying these as US citizens do).  Another manager mentioned that a Japanese insurance company is very interested in having a portfolio managed in the US that invests in Business Development Corporations (BDC).  Not only are they sporting good yields (many times in excess of 10%), but the 30% withholding tax on the income earned on BDC’s by foreign investors was eliminated in January of this year, making these investments significantly more attractive to foreign investors.

On the equity side, there were some very interesting tidbits.  First, because of lower interest rates, many large companies have leveraged up their balance sheet to support the company’s stock price.  This leveraging has been occurring while company revenues have been virtually flat the past few years.  The one sector many fund managers talked about being overvalued is the consumer staple sector (i.e., Procter & Gamble, Clorox, Pepsi, Dr. Pepper, etc.).  Many individuals have been buying these stocks for “safety”, not understanding the high price they are paying for businesses where organic growth is negligible.   Small companies, on the other hand, that are borrowing money are doing so because of an expanding business.  They don’t have access to cheaper financing as large companies do and are not doing “financial engineering” that temporarily increases the price of the company stock.   This is a much better avenue to produce longer-term shareholder value.

What does this mean for your portfolio?

We use a proprietary, disciplined investment approach here at THOR, but it is good to hear from others that what is happening in the trenches matches up with our investment theses.  THOR continues to be underweight stocks and traditional bonds, but overweight alternatives.   In the equity space, we continue to have our lowest exposure to US large company stocks.  In addition, we have a meaningful weight in Master Limited Partnerships (MLPs) which invest in midstream US oil and gas pipelines.  These partnerships offer compelling yields – almost 10% and those yields should increase over time.  As both foreign and domestic investors look for yield, MLPs continue to look very attractive.  Also, our exposure to BDCs should benefit from the regulatory changes mentioned earlier and the worldwide search for yield.