April 2023

Searching for Yield – Considerations in Today’s Market

By Richard Hillson

We live in interesting times. This certainly relates to the financial world where equity markets
underperformed in 2022; fixed income assets have not been delivering but have rebounded;
inflation is a concern for everyone; and many are awaiting how interest rates affect real estate.
Where do investors and advisors look for growth investments and yield?

1
In the 80s, US treasuries can be argued to be one of the best investments of the decade. After
years of underperformance, 10-year treasuries are at a ten-plus year high. Interest rates are at
their highest since 2008, but does anyone really expect them to stay at this level? Inflation has
subsided marginally but is still a concern. The CPI improvement fuels the argument that the FED
will take a more dovish approach going forward.

If we buy into the argument above, is now the right time to lock in longer term yield?

On the face of it, this approach is compelling and we expect investors to continue to return to
traditional fixed income assets, especially if, as anticipated, equity markets continue to
underperform. I have written articles about how traditional 60/40 equity/Fixed Income
portfolios had pivoted to more of a 70/30 and how that concerned me in exacerbating an
overheated equity market. Perhaps we now see a move to more of a 50/50 split.

I am personally in favor of investors locking in attractive yield plays now while they can but the
bigger question in my mind is which asset classes are worth considering to deliver this yield.

Historically, any allocation to alternative investments has come from the 60 bucket rather than
the 40. I have long been an advocate for a different approach. Even if an asset is classified as an
alternative investment and therefore wrongly perceived as risk capital, we should consider
what the goal of the investment is. If the alternative asset is a predictable, real asset backed
yield play, this should be considered part of the 40 in the 60/40 equation. I believe this is a
misstep many investors make which results in a poorly balanced portfolio, mainly due to the
misunderstanding and misclassification around ANY alternative investment.

The ”smartest guys in the room,” the endowments have allocated a lower percentage to
traditional Fixed Income assets than the average investor, choosing to allocate more heavily to
alternative strategies.

2
When searching for yield, we should not limit ourselves to the model which worked in the 80s
and 90s. Take an example of a commercial real estate play for, let’s say, an Amazon distribution
facility. This is a predictable income play, not a total return play. The default risk and risk profile
of such an investment can be argued to be less than many corporate bond instruments. Yet,
most will still classify this as real estate and therefore part of risk capital in their alts bucket.

I am a firm believer in using alternatives as part of the income component of a portfolio.

Nowadays, we have many institutional quality opportunities available to the regular High Net
Worth Accredited Investor, not only for the Qualified Purchaser Ultra High Net Worth. This is a
welcome trend in the industry. The first asset class which will come to mind for most is real
estate. There are many options available including multi family, commercial, industrial, medical,
self-storage, and digital infrastructure. For yield investments as well as total return. Private
credit is a growing area of the marketplace, including venture debt.

3
Just as availability has expanded to include retail capital, the verticals within the alternative
asset classes are likewise expanding. Within Private Credit particularly, we are seeing thematic
funds emerge which allow investors to more precisely target a particular strategy without
accreditation requirements.

An area which might not be on the radar for most involves sustainable assets in the private
credit vertical. One particular strategy within this industry involves solar loans. An interesting
example is the Finite Solar Finance Fund, which allows investor access to solar credit - that
is, acquiring debt from residential, commercial and publicly traded companies.

“The Finite Solar Finance Fund (SOLRX) is focused on opportunities within solar credit. We aim
to invest in high total return opportunities within the U.S. solar market with a primary focus
on delivering current income to our investors.”

- Ron Lynch – Director of Sales, Finite.

In my experience, advisors and investors have been slow to adopt emerging asset classes in the
alts space and most are still unfamiliar with private credit in general, nevermind the sustainable
pocket within private credit. It is encouraging to see a sponsor in this space start to gain
traction and see the beginnings of changing sentiment.

“In conversations we are having with advisors and HNW investors, it is pleasing to see a
change in attitude. The community is becoming much more open to looking at non-traditional
sources of yield. We know that sustainable investments are very topical at the moment, but
not often discussed in the yield conversation.” – Ron Lynch

4
We have talked about the argument for locking in yield now and most advisors and investors
would be in agreement. What the majority are not building into their strategy is to open up to
yield from non-traditional asset classes. I am happy to see sponsors such as Finite provide
education and support to enable advisors to get comfortable with some of these more niche
strategies.

I have long said that alternatives, less-correlated investments must be in every portfolio. The
next step is to consider alts for yield, not just as risk capital.

Richard Hillson

Hillson Consulting is a boutique investment consultancy founded by financial services

entrepreneur Richard Hillson. The company helps independent advisors enhance and improve
their offerings and drive revenue through alternative investments. HC also works with product
sponsors to help them with education and access within the independent RIA channel.

richard@hillsonconsulting.com

Ron Lynch

For more information about Finite and the Solar Finance Fund:
https://finite.io

ron@finite.io