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Laton Spahr, President of SS&C ALPS Advisors, joins Yahoo Finance’s Julies Hyman to wrap up how the market was in 2020, the biggest investment lesson to take away from the year, and what to expect in 2021.
- Well, in addition to watching all of the goings-on in Washington, just want to mention we got some economic data as well, the last report of the year. Jobless claims declining by 19,000, coming in at 787,000 last week. That is better than estimated, lower than the estimate by economists. To talk about that and talk about the outlook for the new year, I want to bring in Laton Spahr. He is president of SS&C ALPS Advisors.
Laton, thank you for being here. So given all of this that has happened and as you look back over 2020, as an investor, first of all, you know, given what we've seen the trajectory of the economy-- we're showing those jobless claims right now-- what would you say is your biggest sort of investing lesson that you have taken away from this year?
LATON SPAHR: Yeah, so 2020 is chock-full of lessons. I think the ones that are most important are the fairly simple ones, right? Be patient. I was working with a group of 16-year-olds in March of 2020 and we were talking about the market decline. And when you're that age, everything's long-term, right? And we were able to talk about thinking for the long term and being patient. And a lot of those students started investing through the crisis. And, you know, I think that long-term perspective is one of those things that can always be reinforced. And this was a year where thinking long-term, extending your time horizon when you go through a crisis, is really important. And I think that's one of the lessons that was reinforced this year.
I think another lesson is that diversification matters. And we've seen a good year in the bond market. We've seen a good year in commodities. We've seen a good year in equities from point to point. But we had to go through a lot of volatility.
So, you know, it's fairly fundamental lessons. I think the important part there is that sometimes what it takes to make good investment decisions is very different than what we're going through in our day-to-day lives, right? We were thinking very short-term individually in March and April. And really, through 2020, it was all about improvisation in the short term. In the investment business, it's about thinking long-term, and I think that was reinforced this year.
- Yeah, even at times when it's really challenging to sort of separate what is happening in the world and that long-term view. And you have a list of sort of five things to watch going into 2021. So I just want to run through them with you and kind of break them down if we could. So your first thing to watch is commodities as an asset class. And what do you mean by that? I mean, certainly they have not moved altogether in 2020. You can take gold and oil as just an example.
LATON SPAHR: Right. So, you know, 15 years ago it became really popular-- there was some academic research that encouraged a lot of investors to move, you know, 5% to 7% of their allocations into commodities as an asset class, as an asset allocation. And, you know, as we exited the big boom in emerging markets and we went through the collapse in oil prices, the bloom really came off of that rose of thinking of commodities as an asset class allocation.
And I think what we've seen over the course of the last couple years with what's happened in oil, what's happened with the lack of capital investment in commodities, what's happened with the supply chain through the COVID crisis, I think we're now in a period where over the next three to five years, the returns you're going to see across a broad commodity suite are pretty good.
And we can go back to some of that early research that shows that the correlation between commodities, equities, and bonds is low. And from here, I think they have pretty good real returns. And so bringing those back into a portfolio, I think, is gonna gain some attention again in 2021.
- Interesting, all right. And moving on to your second point here-- or maybe if I can kind of bounce around a little bit because I want to make sure that we mention all of them-- you say active ETFs find their groove, but the clean energy/sustainability investing one is interesting because this is a trend that already started, right? And it's been very uneven, particularly on the clean energy side. Do you think that President-elect Biden is really going to give a lift to this industry?
LATON SPAHR: Yeah, I think there's little doubt that having Biden in the presidency is gonna bring a lot of attention to this in the United States. I think something else that has really changed is that China has started to talk about, you know, really reducing their carbon emissions, and they're the largest carbon emitter on the planet, and they've been resistant, you know, because it is an economic cost up front for them to invest in that. But this year, Xi's made a lot of statements about China getting serious about this.
So, you know, when you put all of the clean energy investment in the context of the Chinese economy and the US economy, the two largest economies in the world, and you look at it over a decade, it really looks like this is a sustainable trend, right? We've had a great year in the theme and the contextual concentration around energy and around ESG, but it does seem like this is a generational investment opportunity.
- Let's circle back to the active ETFs point right now because I've had a lot of people say this to me this year, that we're going to see in 2021 more differentiation between stocks. It's a stock pickers market is the cliche that's frequently used although, to your point, over the long term, you buy the index and forget it, you've done pretty well. So why do you think active ETFs might be coming into their own in 2021?
LATON SPAHR: Yeah, so, I mean, active investing has had a heck of a headwind over the last decade. And, you know, one of the biggest headwinds is the cost of implementation of active investing through, you know, mutual funds, which has been the, you know, the primary wrapper of equity, active investing. What we've seen is that active ETFs and the new technologies there lower the cost of implementation. So anything that an active manager can do to get closer to that lower-cost option within the passive market, you know, I think, is going to see faster adoption.
Now, there has been a huge amount of inertia, you know, the profitability, the distribution structure, mutual funds, that has really slowed the shift to the active ETF wrapper and the semitransparent technologies in particular. But I think it's becoming very clear that active managers need to get to that side of the bridge, really to lower costs. And it also improves overall tax efficiency.
So when you put those things together, we've seen, you know, a couple announcements this year where we're seeing conversions from mutual funds to ETF structures. We're seeing more option of the semitransparent technologies. In my opinion, they're-- it's just a better mousetrap. And we have to get past the inertia of what tradition has been and what the distribution process has been, but we're gonna adopt the better mousetrap.
And it's a little bit of a benefit for active managers. I think what we've learned over the last decade is that there were too many active managers. A lot of them didn't add value. So we're seeing consolidation and shrinkage there. But it's an important part of the market I think active management adds a lot of value in general. But those that lived on the margin, they're just going away. And active ETF shifts are part of that evolution.
- Yeah, this is kind of a shakeout like we saw in the hedge funds, but on a bigger scale because there are more of them. So I want to skip to number five to to end up, because I want to talk about private equity. When you say private equity goes to Main Street, explain what you mean by that. We have had, obviously, an enormous amount of interest in things like SPACs and IPOs this year. This would seem maybe to be a related-- a related emerging trend. So what do you mean?
LATON SPAHR: Yeah, so I think the first point is with interest rates as low as they are, the great run we've had in equity markets, you know, investors are looking for returns in further and farther places. And one of the areas of strong returns, historically, that has been closed off to retail investors, is private equity and private credit.
And part of it is the qualification procedures are difficult. It's been a very manual process. You know, there's a lot of paperwork. The transparency into the managers has not been very good. All of that is in the process of changing. You know, there are a number of technology and service providers that are learning how to streamline the qualification and the paperwork process. There's more research being done that looks more like mutual fund research, so the transparency is really improving.
And then this year, I think one of the capstone events was the opening up of a possibility of putting private equity into 401k plans. And regulators have opened the door to this. You know, private equity firms and public equity investors are looking for ways to pair together the illiquid private portion with a little bit of a liquidity vehicle that allows that inflow and outflow dynamic of a 401k.
But the demand is there. If we get to registered investment advisors and we can talk to them about bringing in smaller-scale private equity investments-- call it $25,000 at a time instead of $1 million at a time, largely because of that automation-- we think there's a huge shift of capital that starts to move towards private equity. And it's fueled increasingly by, you know, you and me as retail investors, not just the big foundations and endowments. So we think 2021's a year you see the technology breakthroughs, you start to see regulation follow behind that. It's a long, long theme. But we think 2021's an inflection year for it.
- Interesting. Definitely an interesting trend to watch. Thank you so much, Laton. Good to spend some time with you, and happy new year to you. Laton Spahr of SS&C ALPS Advisors. Thank you.