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How to Get Clients at Ease with Global Bonds and Alts

By Crucial Clips     August 30, 2017
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Jun. 5, 2017 

BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi, this is Bruce Love with Financial Advisor IQ. And I'm here with Steve Cucchiaro, the president and CIO of 3EDGE. How do you make retail customers in the U.S. comfortable with foreign fixed income, though? It's traditionally not been an area they've been that comfortable with.

STEVE CUCCHIARO, PRESIDENT AND CIO, 3EDGE: And I can't say I argue with that right now because we believe that all government fixed income largely is overvalued. All government fixed income has benefited tremendously from the fact that central banks in the US, in Europe, in Japan have bought literally trillions of dollars' worth of bonds and placed them on their balance sheet, therefore elevating bond markets or depressing yields far more than what would normally be.

So we do think while markets will always move in fits and starts, that generally rates will go up around the world, including non-U.S. And so we don't find traditional bond markets attractive, whether it's U.S., Europe, or Japan.

BRUCE LOVE: So Steve, how do you make clients more viable, more open to investing overseas?

STEVE CUCCHIARO: We think that it would be through equities. And we think that where Europe has so underperformed the U.S. since the financial crisis of 2008, where Japan, where emerging markets, they've also underperformed. This is now their chance to do better now.

Over the century, over the last century, the U.S. stock market has performed roughly on a par with non-U.S. stocks. But every five or 10 years, one greatly outperforms the other, and we're at the tail end of one of those periods. So we think it could be a time to rotate.

BRUCE LOVE: Steve, we've talked about equities and fixed income. If you're looking at a diverse portfolio, what else should you be really contemplating in terms of other asset classes?

STEVE CUCCHIARO: Another category that's important, at least to include in a potential allocation on behalf of clients, would be real assets. And often gold is a good example of a real asset. And the reason why that's important is that, when one wants to hedge against the potential for an equity market to correct or to come down, depending on the economic situation, it's often different what's the best hedge.

Sometimes if equities are coming down because the economy is slowing, then bonds can be an excellent hedge. If the economy is slowing, interest rates typically come down, and bonds might be that good hedge. But what if we have a situation like in the 1970s, when the stock market took a big hit but inflation rised more quickly than expected?

And the central banks were not able to keep up with inflation. We had negative real or inflation-adjusted interest rates. Well then, real assets were the very best hedge you could have against the decline in equities. So from time to time, it is worthwhile to think of real assets as another alternative hedge against an equity downturn, including gold.

BRUCE LOVE: Steve, thank you very much.

STEVE CUCCHIARO: Thank you. It's a pleasure to be here.