John Schmit, Portfolio Manager and Investment Committee Member at Hightower Signature Wealth, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the benefits of real asset exposure in times of monetary inflation.
Traditional balanced portfolios, weighted with a 60/40 or 50/50 ratio to stocks and bonds, hold nominal instruments that don’t keep up with inflation. To offset this risk, Hightower adds real asset allocations to portfolios, such as infrastructure investments in publicly traded securities. Schmit is more concerned with price levels and monetary inflation than CPI inflation, which is the growth of prices.
Infrastructure investments are typically made in regulated, non-cyclical businesses, such as utilities or pipelines. These monopoly-like businesses generate strong cash flows and can compound wealth over time. Real asset investments can also be made into metals miners or physical metals, with a current preference for copper and silver. Besides traditional real asset sectors, Schmit searches for companies that can pass along price increases during periods of inflation.
Schmit advises investors to be aware that technology stocks may be priced on the expectation that dividends will be paid at some point in the future. The hyperscalers have large capital expenditures, financed largely with debt, which is changing their business models. The business model increases the risk to the future price and availability of electricity, which is not a risk hyperscalers have typically been exposed to. While some are currently trading at price-to-earnings ratios above 40, businesses exposed to cyclicality and commodity price risk have typically traded closer to 10 times earnings. Schmit predicts that there will be massive beneficiaries from the increased productivity provided by artificial intelligence, but it is not clear yet who those winners might be.
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