Real and Alternative Assets Outlook

While private equity valuations may be high, we believe the debt financing these deals could be attractive.

Commodities

We maintain our neutral view on commodities as risks look more balanced now, following the strong rebound across the complex since mid-February. This rebound came on the back of a weakening U.S. dollar and a decline in concerns about growth in China and beyond. Oil prices also reflected concerns about diminished supply out of the U.S. and Nigeria, which may prove temporary. Precious metals have been highly correlated with the decline in Treasury real yields and demand for safe haven assets.

Commodity Prices Remain Correlated With USD

Source: Factset. Data as of June 15, 2016.

Hedge Funds

Hedge funds have had a tough stretch over the past year. Investing conditions have in some cases been even more challenging than in 2008, as high holdings concentration and crowded trades exacerbated poor performance. The AAC downgraded directional hedged strategies to “Neutral” with the view that certain strategies, such as Event Driven, might continue to be challenged. Strategies such as hedged equities could see tailwinds, however, as stock correlations have declined. Global macro and trend-following strategies could also fare well as central bank and macroeconomic news continues to move markets.

Private Equity and Debt

Just as in public market equities, valuations in private equity have increased. The valuation gap between public and private equity remains wide, however, making private equity still attractive on a relative basis. Moreover, in the past, fundraising vintages that coincided with the top of the valuation cycle have often performed well because the capital gets invested over two-to-three years, as valuations fall from their peak. It is interesting to note that valuations for mid-market buyouts have become more expensive as deals have become more competitive, leaving potentially better value in large buyouts. While private equity valuations may be high, we believe the debt financing these deals could be attractive: leverage remains modest, debt structures are relatively conservative and, of course, interest rates are very low. As banks withdraw from some lending under pressure from new regulation, there may also be a long-term opportunity for direct lending and collateralized loan obligations (CLOs) to play a bigger role in the financing of these deals.

Currency

USD: We have moved to a slight overweight view on the basis of continued low U.S. unemployment, strong consumer confidence, declining correlation with commodities, a marginally more hawkish message from the Federal Reserve and continued aggressive easing from other major central banks.

Euro: We have moved from slightly underweight to neutral on the euro as solid growth in the broad money measure leads a gradual recovery in economic growth, and the current account remains in surplus. However, weaker than expected growth and inflation dynamics could cause ECB to ease further and weaken the single currency.

Yen: We have moved from slightly overweight to underweight as market participants have built large positions in the currency. The BoJ has promised to ease until its policy target is reached, but disinflation has actually worsened and a stronger yen is undesirable as it erodes confidence and corporate profits. Yield differentials with other currencies are widening as rates become more deeply negative.

Pound: We reduced our view on sterling to neutral by the time of the U.K.’s referendum on EU membership on June 23, after holding an overweight position through most of the prior three months. We will now evaluate the impact of “Brexit” on the U.K. economy and believe sterling exposure could become more attractive if the value undershoots due to overly negative sentiment.

Swiss Franc: We maintain our underweight view because we believe the Swiss National Bank will attempt to fight further currency appreciation in order to support exports and combat disinflation. The Swiss franc is also one of the most attractive funding currencies for carry trades.

About the Asset Allocation Committee

Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 25 years of experience.

Committee Members

Joseph V. Amato | Biography
President and Chief Investment Officer

Thanos Bardas, PhD | Biography
Portfolio Manager, Head of Global Rates

Alan H. Dorsey, CFA
Chief Risk Officer

Richard Gardiner
Head of Investment Strategy Group,
Chief Investment Officer—Neuberger Berman Trust Company

Ajay Singh Jain, CFA | Biography
Head of Multi-Asset Class Portfolio Management

Erik L. Knutzen, CFA, CAIA | Biography
Chief Investment Officer—Multi-Asset Class

David G. Kupperman, PhD | Biography
Co-Head, NB Alternative Investment Management

Ugo Lancioni | Biography
Head of Global Currency

Wai Lee, PhD | Biography
Head of the Quantitative Investment Group, Director of Research

Brad Tank | Biography
Chief Investment Officer—Fixed Income

Anthony D. Tutrone | Biography
Global Head of Alternatives

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or a loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the investor’s state of residence. High-yield bonds, also known as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be more volatile than investment-grade bonds and may fluctuate based on interest rates, market conditions, credit quality, political events, currency devaluation and other factors. High Yield Bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability of tax-exempt investments in your portfolio. Government Bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, interest rates, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or options on futures, which involve significant risks, such as volatility in price, high leverage and illiquidity.

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