Investing outside of the Mag 7: Private equity
US Equities (^GSPC, ^DJI, ^IXIC) are moving higher on Tuesday afternoon as the broader market anticipates the Federal Open Market Committee not to move interest rates following its two-day meeting. Alger Director of Market Strategy Brad Neuman joins Yahoo Finance to discuss potential plays for investors as the Federal Reserve appears to embrace a higher-for-longer approach.
Neuman suggests that investors consider alternative asset managers: "So here I'm talking about the public equities of companies that invest in private equity. The case for these stocks is that institutions like pensions endowments have like a 20% to 30% of their allocation into privates, but the mass affluent in this country is about a 3% allocation. In fact, just recently this week CalPERS announced they would be 40% private markets."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
Video Transcript
- There has been a lot of talk when it comes to a no landing versus soft landing scenario. Considering a rat with interest rates where we're at with inflation, which camp are you ultimately in right now?
BRAD NEUMAN: I think that the economy will weaken a little bit from here. But recession seems it's off the table now. You saw housing starts being reported-- the housing market seems to have bottomed. It has been coming back and manufacturing even may be coming back to some extent. And that leaves the consumer and the consumer has proven awfully resilient.
- There seems to be this growing chorus that maybe we do here for a pullback call it 5% to 10%. If you saw that Brad would you be a buyer on that weakness?
BRAD NEUMAN: Well, I think there are some very attractive parts of the stock market right now. Particularly the stocks that have gotten beaten up by rising interest rates. So we've seen a very high negative correlation with small cap stocks. Small cap growth in particular and interest rate's been a -85% correlation over the past few years. And they've gotten extremely cheap. They used to trade at historically a 10% premium to the broad market. Today small cap growth stocks are trading at a 20% discount on a price to earnings basis. So that area of the stock market seems to present some attractive opportunities in my view.
- So, bullish on small caps and we have seen this pullback more broadly in the Magnificent Seven. What other areas of the market do you think there are opportunities when we look down the line? And where the Fed could potentially move?
BRAD NEUMAN: Well, I was on the program in early 2023 we talked about AI and the infrastructure AI plays there. Like hardware and Nvidia and software Microsoft. And then when I was on late last year broaden that out because there was a lot of enthusiasm for AI. And we talked about tertiary AI plays like power and those kinds of things. And now we still AI certainly for the long term. But. The sentiment is fairly robust there. And so I'd be looking at some other themes. Some other--
- What Brad? What would be on your radar?
BRAD NEUMAN: Yeah, alternative asset managers. So here I'm talking about the public equities of companies that invest in private equity. And the case for these stocks is that institutions like pensions and endowments have like a 20% to 30% of their allocation into privates. But the mass affluent in this country have about a 3% allocation. In fact, just recently this week CalPERS announced they were going to 40% private markets allocation. But anyway every move from that 3% up-- if they went from 3% to 4% for-- in within the retail market that would be like a 15% growth in AUM for this market. So I think there's a big growth potential for the likes of Hamilton Lane and stepping stone-- StepStone. They've made some really good innovations. They've allowed the private market to get-- they've allowed retail to get into the private market with much lower minimums than we typically see like $50,000 type minimums. And also having monthly liquidity. So I think those innovations may open up the retail market to private equity and that could be a boon for those types of stocks.
- What about besides AI one of the-- I mean certainly one of the hottest trends investors are focused on pharma? I'm just interested in any examples there. I think they were small maybe in large cap names Brad you were interested in?
BRAD NEUMAN: Well, of course we think GLP 1 is going to extend its indications for use for different potential disease states. And so we own Eli Lilly and abroad Novo Nordisk. So still think that's an interesting play longer term.
