- Portfolio diversification is a universally accepted key to investing — especially in rocky years.
- Mark Yusko, founder of Morgan Creek Capital, shared his four-part investing strategy.
- Here’s how to handle investments in stocks, crypto, fixed income, and commodities.
Mark Yusko, founder of North Carolina-based investment advisory firm Morgan Creek Capital, agrees with two universally accepted tenets of investing: keep a long time horizon, and diversify. But his views on how to do that differ from the consensus.
In Yusko’s “all-weather portfolio,” which is built for the “stormy seasons” that 2022 may bring, there’s room for both gold and digital gold, for ultra-high-risk Chinese technology stocks and rock-solid pipeline companies. It’s an unorthodox mix, and it’s not a recipe for getting rich quick — which is just fine with Yusko.
“People should really think about portfolios with an annual and multiyear view as opposed to the day trading that goes on,” Yusko told Insider in a recent interview.
No annual view of what’s ahead in 2022 would be complete without an opinion on how the
Federal Reserve
will handle inflation that’s nearing 40-year highs. Whether the US central bank can unwind its pandemic-era emergency policies while keeping price growth in check and appeasing investors is a key storyline to watch this year, Yusko said.
“We are at the tail end of, really, a historic period of
liquidity
provision by global central banks,” Yusko said. He continued: “The whole world is awash with liquidity. And that had an impact on the valuations of all assets from stocks to fixed income, to currencies, to commodities, to housing prices, to collectibles, to cryptocurrencies. Everything was in this wild
bull market
over the past 18 to 24 months.”
Keeping up with the market’s twists and turns can be exhausting for investment advisers — not to mention retail investors trying to build a winning portfolio. To simplify this complex landscape, Yusko told Insider about his 2022 outlook for stocks, fixed income, currencies, cryptocurrencies, and commodities — and specific steps investors can take to achieve diversification.
Stocks
For years, investing in a broad-based index of stocks was a nearly foolproof strategy. Simply mirroring the S&P 500, which has returned between 16% and 29% annually over the past three years, proved to be a profitable tactic.
But the Fed’s decision to take its foot off the proverbial gas pedal and scale back its easy money policy will make this dynamic a thing of the past, in Yusko’s view. It’s time to get picky about stocks.
“We believe that US equities are highly overvalued, particularly FANGMAN stocks: Facebook, Amazon,
Netflix
, Google, Microsoft, Apple, and, Nvidia,” Yusko said. “So we think the high growth names are going to struggle in a risk-off environment, a liquidity drain environment.”
Instead, Yusko is interested in a pair of trades with recent returns that couldn’t have been more different: Energy producers in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which rose nearly 64% last year, and Chinese technology stocks in the KraneShares CSI China Internet ETF (KWEB), which tumbled by 52.5% in 2021.
Energy stocks are coming off an outstanding year — the sector rose 53% in 2021 — but Yusko sees more gains for the sector as oil prices stabilize thanks to steadily rebounding demand. He said his favorite name in the space is Diamondback Energy (FANG), which is one of the largest holdings in the aforementioned XOP exchange-traded fund.
There wasn’t just one reason Chinese stocks had a brutal 2021, but there is a common thread: the Chinese government. Increasingly hostile rhetoric and actions from the nation’s authoritarian leadership resulted in mammoth fines levied against tech giants, stringent compliance burdens, and even the upheaval of entire industries like after-school tutoring.
But major players in the industry, including Alibaba, Tencent, and JD.com, are value plays — not value traps, in Yusko’s view. Caution is warranted, but the space is brimming with opportunity.
Fixed income
On the fixed income front, investors will need to search high and low to find yield. In a high-inflation regime where interest rates are rising, Yusko said US Treasuries are falling out of favor.
“I probably wouldn’t own traditional bonds because I worried about rising interest rates,” Yusko said. “So I would own bond substitutes.”
One alternative to investment-grade bonds is the ALPS Alerian MLP ETF (AMLP), which holds master limited partnerships — publicly traded entities that are taxed as partnerships instead of corporations. Names in the exchange-traded fund primarily come from the energy sector.
“These are the pipeline companies, the infrastructure companies, that transport hydrocarbons — oil and gas — and they are poised to just gush cash this year,” Yusko said. “It’s got a 7.8% yield, so triple what you can get, almost quadruple what you can get in traditional bond markets, double what you get in high yield. And so AMLP should be a big chunk of your bond bucket.”
Another way to find fixed income is in Barings BDC (BBDC), which is an externally managed, closed-end investment firm that’s regulated as a business development company. In essence, it lends to small businesses and thus is tied to the strength of the economy, Yusko said.
“We think it has a tailwind as economies heal and we get back to reopening after the Omicron wave,” Yusko said.
But what makes Barings BDC most attractive, in Yusko’s view, is its 8% dividend — especially in a world where the 10-year US Treasury note yields 1.75%.
Currencies and cryptocurrencies
Turbulence may hit financial markets in 2022 as the Fed reels back its emergency monetary policy. He advises against owning the dollar, yen, or euro, which he believes will weaken.
“In times of stress, you want to own currencies that are not fiat,” Yusko said. “I’d own cryptocurrency instead, because I think as the currencies — fiat currencies — weaken, cryptocurrencies will continue to appreciate.”
For those that can stomach the wild
volatility
that cryptos inevitably bring, Yusko prefers to get exposure through Grayscale’s Bitcoin Trust (GBTC), which he noted provides up to a 20% discount on the underlying assets, and Ethereum Trust (ETHE). Annual fees are steep at 2% and 2.5%, respectively, but the trusts allow investors to buy into them from their brokerage accounts.
Commodities
Some investors believe bitcoin is for millennials and Gen Zers, while gold is for baby boomers. But there’s no reason the two assets should be mutually exclusive, Yusko said.
It’s been a rough decade for the yellow metal. Gold prices are up just 12.5% since January 2012 and have barely budged in the past year — despite inflation that’s hit 39-year highs. What should, in theory, have been a once-in-a-generation catalyst for gold instead did little to move the needle.
But Yusko spies an opportunity that can only be described as golden. The SPDR Gold Trust (GLD) and the VanEck Gold Miners ETF (GDX) are his favorite ways to play the space.
“The price of gold is depressed, but the relative price of the mining companies is even more depressed,” Yusko said.
In addition, Yusko thinks the Invesco DB Base Metals Fund (DBB) could take off as a massive shift to electric vehicles drives demand for base metals like lithium and cobalt.
