MASTERCLASS: Liability Driven Investing - October 2019
October 7, 2019
Remy Blaire: Welcome to Asset TV. Real assets encompass a range of investment options that offer diverse benefits. Incorporating alternative investments into a portfolio can protect investors against small utility and downside risk. Joining us today to discuss real assets with a focus on real state and gold are Ed Coyne, Executive Vice President of National Sales at Sprott Asset Management, Juan Carlos Artigas, Director of Investment Research at the World Gold Council, Ryan Dobratz, Lead Portfolio Manager of Real Estate at Third Avenue Management, and Dr. Randy Anderson, President and Chief Economist at Griffin Capital Asset Management.
Remy Blaire: This is Asset TV's Real Asset Masterclass. Gentlemen, thank you so much for joining me today. Well, real assets do offer exposure to investors in different ways than other financial assets. So today we'll be focusing on real estate and gold. Now I want to start out with the precious metal with you, Juan Carlos. So, can you start out by telling me about whether or not most investors consider gold a real asset or a commodity?
Juan Carlos Artigas: Well, I would say both and many other things as well. There's not necessarily a majority of investors that choose to buy to one label. Some investors do see gold as part of their broader commodity exposure, but many see it as a real asset. Now interestingly, there are other views on gold as well as a currency. The reality is that this is a byproduct of the uniqueness of gold. Gold is a very unique asset for many, many reasons and that's one of the reasons why perhaps there's no unified view on this.
Remy Blaire: I'm sure depending on the viewpoint of the investor; they'll treat it differently as an investment. So how do you see different types of investors treating gold?
Juan Carlos Artigas: From the perspective of the role that gold plays in a portfolio, I think that it’s very common, right? So, we describe the strategic case for gold, or the reason why investors think about gold with four main characteristics: a source of returns, diversification, liquidity, and combine the portfolio impact it has, or the enhancement to the portfolio. Now, what happens though is that depending on how investors see gold or view gold, that's where what they may be replacing gold, maybe actually replacing all their parts of the portfolio with gold. For example, if they see it as a real asset, they may be looking at the real asset component and saying, okay I like gold. I like the perspective that it brings to our portfolio. So, what I may be replacing within that pocket and so on. So, it's more about the application rather than necessarily the perspective of it.
Remy Blaire: Now Ed, onto you. There are so many options when it comes to investing in the market, especially in real assets, but when it comes to precious metals in particular gold, why should investors be focusing on this metal?
Ed Coyne: You really have to go back the last 20 plus years to look at why gold has become part of an investor's portfolio. Today with ETFs, mutual funds, closed end funds, all these options have made gold much more accessible to the average investor. If you think about 30 years ago, it was very difficult for the typical investor to allocate capital to gold, if they were not large institutions. It was very hard to source gold, store it, track it, move it around, and have it show up on your balance sheet. Today, gold has become much more accessible, and it's really bifurcated or segregated itself away from the traditional commodities basket. When you think about gold from a performance pattern standpoint, the performance of gold is very different than the performance of general commodities, particularly in the last 20 years.
Ed Coyne: Most people are surprised when they look at the return patterns of gold for the last two decades. Gold has actually outperformed the S&P 500, and that's including reinvestment of dividends. Most investors don’t know this because during the last seven, eight years, with QE and so forth, the S&P has done very well, and gold has been left behind a bit, but people need to think about gold as an alternative. At Sprott, we like to say gold is really the original alternative investment when you look at its performance patterns. When people talk about alternatives in general, the main goal of an alternative asset is to perform differently than stocks and bonds. When you look at the performance patterns of gold, both physical bullion and gold mining equities, they tend to do that in spades over multiple market cycles, particularly in moments of stress. That's really why people need to think about gold as an alternative investment, and not just place it in the overall commodity bucket.
Remy Blaire: Now that we've discussed gold, I do want to move on to real estate. Now when it comes to that real asset, we often hear it's a good hedge against inflation and a great store of value. So, Ryan, can you tell me why real estate.
Ryan Dobratz: Real estate is an essential part of everyone's allocation, or at least it should be, and it's for those reasons that you mentioned: it's a great place to park capital and protect it from inflation over time. That's especially the case if the property is well located and properly financed. At Third Avenue we have elected to get that real estate exposure for our investors by investing in the listed markets, and that really has some interesting advantages in the sense that by investing in real estate through the listed markets, you can get access to some of the best property types, some of the best assets not only in the U.S., but also internationally. In addition, you can invest alongside some of the best management teams and get access to very cheap capital both through secured and unsecured financing.
Ryan Dobratz: Our favorite reason why we like accessing the real estate markets through the listed space is that because of the inevitable ups and downs in the public markets, you can oftentimes buy real estate a lot cheaper on Wall Street than you can buy it on main street. In some cases, 30 to 40% discounts, and so we've been doing that at Third Avenue for more than 20 years now through the Third Avenue Real Estate Value Fund, and it has put up 10% plus annualized returns over the 21 years the fund's been around. So, we think it's a great approach to investing in real estate, which like I said, it should be a key part of most investors’ allocations.
Remy Blaire: Now Randy, I want to move on to you. If you could tell me a little bit about the commercial real estate asset classes. You're an economist, so could you tell us about the different subtypes?
Randy Anderson: Well sure. First of all, there are many types of real estate that you can invest in. Most institutional investor think about the four food groups, if you will. The office market, the industrial market. The industrial market can mean a lot of things. It can be big land in sea ports. It can also be that last mile of distribution. You'd also think of retail and retail again, can be many things. It can be super regional malls; it can be your local grocery store. It can be high street retail like Rodeo drive and multifamily. Really apartment complexes range anywhere from the high rises in New York all the way to walk ups in suburban type areas as well. There's every other type of asset class you can think about. I mean there's golf courses, there's prisons, there's hospitals, there's data storage rooms. We use and consume real estate in a lot of ways in daily life.
Remy Blaire: Gentlemen, whether we're talking about real estate or gold, there are different ways to invest in a gold as well as real estate. So, let's talk about real asset performance. Now for Juan Carlos, starting with you, if you could tell me how gold performs compared to other real assets.
Juan Carlos Artigas: Yeah, so the way to think about gold, it really enhances the performance of portfolios and what makes gold unique is that it has a dual nature. People buy jewelry, gold is an integral part of electronics and technology, but people also buy gold as an investment, as a safe payment. You can see that there's one part of demand, you know the consumer side that is pro cyclical, and the investment side that is counter cyclical. This makes again gold very unique, and that is really what separates gold from many other assets. To Ed's point there before, it's also what has given gold not only its return characteristics, but how it interacts with all other assets in the portfolio.
Remy Blaire: We know that there are bull markets as well as bear markets when it comes to gold. So, Ed, could you give us your position or stance on gold right now? What do you think of the performance in the precious metals so far?
Ed Coyne: You have to look at moments of market or economic stress. You only have to go back to the fourth quarter of last year to see what gold's abilities are and what it can do. During the last four decades since gold's traded freely in the open market, it consistently holds up in periods of times of dislocations or stress in the market. Fourth quarter was a classic example. The Fed was talking about continuing to raise interest rates, with Trump saying pump the brakes. We were on two different sides of the aisle and gold held up by gaining about 7% in the fourth quarter, and the S&P was down over 13%, and the Russell 2000 small-cap market was off over 20%. Everyone's forgotten about that already because we're off to a wonderful start for the stock market in 2019.
Ed Coyne: What's interesting, gold is still outperforming the S&P 500 since its September high of last year. Gold is up about 500 basis points, when the S&P is roughly flat. With gold bullion up slightly, gold equities are starting to take their direction from that. You're starting to see a lot of activity in the M&A market, particularly last year on the upper end of the gold equity space, and that's starting to work its way down to the junior or small-cap space. Equities have done quite well over the last two to three quarters now, particularly because of the M&A market. We're very encouraged right now.
Ed Coyne: To understand the equity side of the gold trade, you should look at the price movement of the physical metal. The physical metal increasing in price really equates to economic conditions strengthening for gold mining companies. You don't want to be thinking about gold equities in a flat to declining market for the metal’s price. Gold should be a core allocation in a portfolio from a diversification standpoint, and gold equities are more tactical. You want to think about them in really their own separate buckets, and that's how we try to get people to view the gold space as an alternative, not as a commodity. We see gold bullion is a core holding, and gold equities as a tactical allocation.
Remy Blaire: I think you brought up two important points when it comes to a real asset, and that's a diversification as well as alternatives. So, I do want to shift the discussion over to real estate now. We are in a very mature economy right now, so why real estate as an investment?
Ryan Dobratz: Yeah, absolutely. As we talked about a little bit earlier, real estate should be a key building block of every portfolio, but that allocation should have the flexibility to invest where there are opportunities globally. There are certain pockets of the real estate universe today that are very far along in the cycle, very expensive, but there are other pockets where there are terrific values-two of which that we have a lot of exposures to in the Third Avenue Real Estate Value Fund. One - the U.S. residential markets and two - in commercial companies that are putting their assets to a higher and better use. Just a quick note on both opportunities, on the U.S. residential front, we have been under building in this country for the better part of 10 years now. Inventory levels in almost every major market are at very, very low levels.
Ryan Dobratz: At the same time employment is rising, household formation is increasing pretty rapidly. There's a lot of pent up demand, and so the companies that have exposure to building more homes were only building 1.2 million annually. Right now, we need to build about 1.5 to 1.6 million each year. Those companies are going to be able to generate higher levels of earnings and cash flows as we go back to normal levels. On the commercial side, it's been very, very competitive especially on the acquisition front given the low interest rate environment. So, we really like companies that have assets so they can put to a higher and better use. Like JBG Smith Properties, which owns Crystal City in Washington DC. Amazon is coming in for their HQ2 headquarters. They're redeveloping the land around that. They're going to be able to earn excess returns relative to going out in the open market and buying assets. So, there are still some great opportunities there despite it being a little bit later in the cycle in certain areas.
Remy Blaire: Well Ryan, I think you highlighted some important points there. So, I want to hand it over to Randy. You're an economist, so I am sure you have a very angled opinions on recent market performance in real estate. So, can you highlight some of those trends?
Randy Anderson: Yeah, sure. So, I mean in real estate it's interesting, you can access it through both public and private vehicles. The private side has been fantastic. You look at the last year, and it's produced about a seven and a half return for core real estate. That's core real estate that has low levels of leverage investing in best properties and best markets, and most of that return has come off from income. When you try to think about 2018, I think one of the top fund managers was out there and said 2018 was a year when almost nothing made money. In fact, private real estate did make money, did perform. How it's going to do going forward is really a function of three things you've got to ask yourself. Are fundamentals good? Broadly speaking, they are good. They're strong. Occupancy levels are very, very high, and NOI growth is strong.
Randy Anderson: Number two, is pricing okay? Listen, real estate's not cheap. It's not 2010 where you can just go out and buy anything, and it would work. If you look at the income returns relative to the tenure treasury, you look at the income returns relative Triple B bonds, were actually the long-term average. So pricing is not bad, it's fair valued. Then lastly, investor flows. Ultimately, the stock market's trading at a very high PE ratios, very high. I mean they did take a little dip as you correctly pointed out, but they're cutting out back and they've really rallied. They're at a high number. In the bond market, you've got lower yields and typically you can find with AG bond in for the benefit of getting that lower yield year longer duration, or more risk or sensitivity to interest rates. So real estate looks pretty good relative to a typical 60/40 sort of stock and bond portfolio.
Randy Anderson: On the public side it's been great. I mean it's been a tough time. 2017 and 2018 were tough for real estate. In 2017, everybody was in a risk going mode. Give me the fangs, give me the S&P and levered up and nobody really wanted real estate. Then in 2018, it did okay. The real market was a negative return, but it was towards the top of the list. The problem was everybody's concerned about the Fed, and they were worried about oh my goodness, the Feds going to raise, they're going to be too aggressive. Your role at Ford and you sit here today, and the real bucket's up about 20% year to date, which is one of the top performing asset classes. You look at read performance over the last 10 years, it's at the top of the list. You look at read performance over the last 20 years, it's at the top of the asset class. So, some of the easy money might've been made this year in the read market, but they're trading at good values. They're part of a nice diversified portfolio and should perform in the appropriate manner going forward.
Remy Blaire: Well, since you mentioned fundamentals, I want to shift the conversation on over two factors and drivers of real estate prices. Starting out with gold and you Juan Carlos, could you give me your perspective on the factors that affect gold?
Juan Carlos Artigas: Sure. There are four broad categories of drivers that influence gold. Economic expansion, risk and uncertainty, opportunity costs and momentum. The first two is what we classify as strategic drivers of gold, usually because investors who hold gold for the long-term as a strategic asset, those are the things that matter most. Economic expansion is linked to consumption of jewelry technology and long-term savings, and you can see it as a source of alpha. Risk and uncertainty are mostly associated with investment demand and is your source of Beta. Now the other two, opportunity cost and momentum are going to influence price performance more in the short and potentially the medium term, and can be used more for tactical adjustments, or for investors who are more focused on the tactical performance of gold.
Remy Blaire: Now that we've gotten that perspective, Ed, I want to get your take on the fundamentals you're paying attention to, and especially given that we've seen so much M&A action last year as well as this year. Could you give us your take on that?
Ed Coyne: If you look at what's going on in the large, senior end of the mining space, we've seen a lot of consolidation. But the consolidation hasn't been taken on with premiums. It's been at market values, and largely that's because these companies are consolidating because gold's been relatively flat. We see this as a bullish sign. Gold has been relatively flat for the last couple of years, but mining companies haven't had expansion of margins and so forth, and they have had to consolidate to expand. On the upper end, we have seen Newmont and Barrack consolidating with other miners. When you peel back the reasons why, it's far deeper than just survivability. These companies understand that we're at peak production. There hasn't been a lot of capital spent on gold mining and discoveries.
Ed Coyne: The easy gold has been found already, so from a geological standpoint, there are supply challenges. You have the buyer-or-build mentality going on in the gold space right now. A lot of the management has turned over, and you only have about 10% of the existing management still in place from a decade ago. We now have more business-savvy managers running these balance sheets, thinking about the amount of debt the company is taking on, the type of debt it is taking on and so forth. Mining companies in general look much more attractive today than they did a few years ago. The question is, where is the gold price going? If the mining companies are run by strong management, but gold's going down, it doesn't really matter. That just means poor economic conditions for the mining company.
Ed Coyne: If you look at the broader markets, we can all agree that we've got way too much debt on our balance sheet from a corporate standpoint. We see corporations borrowing money to pay dividends because interest rates are so cheap. That may last for a while. Think about all the indebtedness at the pension level; nearly every state is under water. That's not going to go away anytime soon. You've got individual debt levels skyrocketing as well. Debt is all fine if GDP is growing, but GDP is relatively muted. I'm not sure there's enough productive output to support these debt levels. The first and foremost thing is again, going back to the gold price.
Ed Coyne: We think there's a 35 to 50% premium in place for a large senior mining cash-rich company to go out and buy a productive junior mining company. It's much cheaper and faster to buy a productive mine than it is to go discover, and then build a new mine, which could take 15 to 20 years to get on online and be productive. We think there's significant opportunity on a tactical side in the equity space, and we've actually started a joint venture this year with one of our peers, John Hathaway, to go specifically after junior mining and mid-cap mining companies that we think are ideal bio candidates. So, we're encouraged by both the price of the physical metal right now, because of the economic conditions and headwinds that we think we're facing in the next, call it six to 18 months. Then we're also encouraged by that fact that that's going to drive the equity space, particularly in the M&As market.
Ed Coyne: We're not always pounding the table. There's times when we're telling people, hey, you may want to trim back your equity position and just have your core position in gold. Right now we are at not a quite pounding table level, but we're very enthusiastic about where we are both on an opportunity standpoint, but also from a valuation standpoint that gold and gold equities look very attractive right now from an evaluation standpoint, particularly when you look at it on a relative basis to stocks and bonds.
Remy Blaire: Well Ed, you gave us a great overview there regarding gold and gold equities. So, I want to shift the conversation on over to real estate. So, Ryan, can you tell me a little bit of the role of a passive investing when it comes to real estate?
Ryan Dobratz: Yeah. The flows of passive funds into real estate are really substantial. In fact, if you look at more widely held real estate companies, we'll call them U.S. REITs, most of their shareholder basis actually comprised of these passive funds. In certain cases, being around 45%. Usually it's in between 40 to 45%. So that's had a profound impact on these companies, and it has negative consequences and also some positive consequences. I mean, on the negative side with passive shareholders owning almost half of these businesses, you can see governance start to slip. You can see management compensation packages start to increase without pushback from a lot of constructive engaged shareholders. So that's one area that we're certainly very focused on, and ultimately, we think that some of the large passive players will have to partner up with active investors to monitor and make changes there.
Ryan Dobratz: On the positive side, with all the funds that are floating on the passive side, we've seen I would say some of the smaller players start to go away. So, there's a little bit less competition in terms of people actively looking to invest capital. Also, there's been a little bit more volatility as funds come in and out of these passive funds, and that's created a great opportunity for bottom up fundamental investors like ourselves, where we can step in and buy companies at significant discounts to what they're worth when there are these market dislocations like what we saw in December, right/ Stocks down 15 to 20% because of macro concerns and out flows. That's created an opportunity. So, there are certainly positives and negatives, and we think that we're a long-term benefactor of the trend now.
Remy Blaire: Well, Ryan, we'll take a closer look at the macro perspective in our next section, but I do want to get Randy's perspective on real estate as well. If you could tell me a little bit about the factors that you're watching as well as some of those key drivers of prices.
Randy Anderson: Well it's interesting at the end of the day how real estate is going to perform is ultimately due to the supply and demand, and fundamental characteristics of real estate. In a very generic level of course, if you've got GDP growth and you've got jobs and you got some constraints supply, real estate does well but it's very different for every property type, if you will. So, you take a multifamily, we invest in a lot of multifamily. We're getting household formation because the economy's growing, but because housing prices have gotten higher and mortgage rates have gotten wider, it's more difficult for folks to buy than rent. So, we're seeing a great demand if you will, on the multifamily side and that's performing quite well. You go to industrial and it used to just be hey, the movement of goods and services are driving demand. So as long as GDP was growing, you do pretty well with a supply constrained environment.
Randy Anderson: Today, industrial is doing so well in a lot of it is e-commerce effect. Everybody's buying their goods and services really online. The growth of e-commerce is exponential. For a retailer, it's more important that you make the sale than it is that you might overpay a little bit for rent to get an industrial place to store your facility. So, somebody clicks, and they get that instant gratification. So that's been performing tremendously well, but you're getting different tenants in industry. We're get a lot of retail type tenants as opposed to manufacturers there. The flip side of industrial is retail. So, retail has either done really well or really poorly. So, if you look back at retail versus industrial for the last 15 years, they've had almost identical performance. Now you roll to the last one year, and industrial is up 14%. That's a huge return, and you've got retail only up 2%. The reason really is because of the change in e-commerce, and how people are using or buying if you are consuming goods and services.
Randy Anderson: The retail side does well if it's experiential, if it's somewhere where people want to go because the economy is doing well, they have money to spend. If it's something you can just click and buy online, you might as well do it from an industrial point of view. Office has been great. We've almost built no new office building since the global financial crisis, and we've had huge growth in office using employees. We would be just the tightest office markets in history if it wasn't for technology. I mean the two most expensive parts of any company, one is the human capital, number two are the buildings. So, people have tried to do cost reductions by having less workers per square foot. Some people tele community. If you're selling, why do you need to be in the office all the time? So, we're taking a little bit less square footage per worker than we used to.
Randy Anderson: So the office market's in good shape, but you've always got to watch the shape of the economy because unlike multifamily, if somebody leaves, you lose a person. If you lose an office tenant, you might lose a floor, or you might lose a whole building. So, you've got to be more cautious as you get a little bit later into the cycle from office relative to say a multifamily type asset class.
Remy Blaire: Well, when we're talking about today's investing environment, we're all watching to see what the Fed speeches bring. We're watching what happens in economic data. We'll be getting a better indicator later on this week in terms of U.S. GDP. Starting out with gold, back to you Juan Carlos, what are the main drivers of gold right now and how do you think this compares to other real assets?
Juan Carlos Artigas: Yes. Building on the drivers that we were discussing before in our 2019 outlook, we highlighted three trends that we think are going to be very important for this year. The first one is uncertainty in financial market and stability that we've all discussed to some degree or another. It was highlighted by the pull back last year and even though again we have recovered, the stock market has recovered quite a bit, what is interesting to see is that investors are still worried. They haven't completely taken off their hedges. So, they want to capture some of the positive trend on stocks, but not completely removed their hedges. So, market risk and uncertainty is something to watch for. The second trend is monetary policy and the U.S dollar. So, as you mentioned before, people are looking definitely at the Fed and what the Fed is doing, and how they may continue with monetary policy, the implications of rates and so on and the direction of the dollar. That's something important to look out for when it comes to gold.
Juan Carlos Artigas: Then finally, the third trend that we're looking for are also structural reforms that many key markets for gold are making. For example, China and India have made over the past couple of years, important changes in terms of how they are trying to run their economy for the long run. Not just for now, but how they can solidify the economy over the long run and that can be very positive for the market.
Remy Blaire: Gentlemen, you've joined me on a very interesting day today since we're seeing the equity market's higher. We are in the midst of earning season, so that could change as we head into the rest of the season, but Juan Carlos, you mentioned the main drivers of gold. Given the recent trend in gold prices, what are your expectations for the rest of this year?
Juan Carlos Artigas: I think the most recent trend maybe a little bit of a byproduct of the risk on attitude that I was mentioning before. There are many investors that of course continued to see the stock market climb up, and they don't want to lose that. What has been interesting is that if when you look at the positioning in gold, when you look at overall level of demand or whether it's positioning on the futures market, investors are not completely moving away. They're keeping some of those hedges, as I was saying before. Again, that I think is quite key to say yes, the risk on attitudes may create an opportunity cost of investing in gold versus the stock market. At the same time, investors want to make sure that they are well diversified and well protected as some of the metrics are not necessarily pointing to a very fundamental growth on the stock market, but rather a continuation of the trend in part to the cheap availability of money.
Remy Blaire: I think you've given us a great perspective on gold prices, and some of the factors that are affecting today's environment. So, I want to move on to you, Ed. If you could tell me a little bit more about gold equities, and when do you think investors should be considering gold and silver equities versus their physical counterparts?
Ed Coyne: Sure, sure and I want to touch a little bit on what Juan Carlos has said as well about the Fed. I think you really have to peel back another layer and look at the why behind the direction. This time last year we were on autopilot, right? With quarter of a point every quarter is going up, we're fine, the market can absorb it. Then we started to pause a little bit, market started to come unglued a little bit, and now we're actually even stopping basically all quantitative tightening and we may even go back into easing maybe in the end of this year, the first part of next year. So, it's not really a direction of is it rates going up or going down. It's really why are they going up or going down, and it goes back to the idea of debt versus productive output. There's a lot of different things you can point to, but what I'm encouraged by again talking about the equity side, is that gold has basically held its own.
Ed Coyne: It stayed in that 1250 to 1350 range. It has been relatively range bound for the last three years. We've had periods of fits and starts where equity has gone up and gold has gone up, but in general if you stretch it over the last 36 months or so, it's been relatively flat. That surprised even us because the equity market has done so well that there's really no need for alternative assets. There's really no need to be defensive. When the market keeps going straight up, why bother? Just put everything in SPY and call it a day? Well that's starting to change, and I think to your point, people are still showing caution. People are still worried. We deal with at Sprott, we deal a lot with high net worth individuals, family offices and so forth, and they're very concerned with where their capital sits. They're more concerned about the preservation of their capital than they are appreciation of capital. So they're looking for alternatives like real estate, like gold as ways to allocate capital away from the traditional markets.
Ed Coyne: So when you think about that, that has to happen first, right? The gold equity story is fun to talk about. Mining companies are fun to look at, talk about investing, but you can't get ahead of yourself really. You have to really continue to look at the price of the physical metals themselves first; gold, silver, even platinum and palladium, right? Platinum and palladium are changing the guard right now from a pricing standpoint based off supply and demand and catalytic converters and so forth, but those things are really where you're going to get the direction when we talk about gold equities. So frankly, until gold really breaks through that 1350, 1400 range and holds, the gold equity story is interesting particularly in the M&A side, but I don't think you're going to see this huge robust move in gold equities until the price of the metal itself starts to move forward. That's going to have positive impacts on the silver side and on the gold side. Silver tends to actually rally quite nicely when gold starts to move.
Ed Coyne: The equity story is one that you had to think about from a tactical standpoint, and really look at the metal first, see where that's going from a directional standpoint. If that continues to start holding its own and start to move forward, then the gold equities can get very interesting because remember again, the price of gold dictates the economic conditions of gold mining companies, right? So, if the price is relatively flat, you could equate that to relatively flat economic conditions for the mining companies. So, there's no expansion. There's no expansion, the stock is going to stay relatively stable. Conversely, if the price starts to go up, that's tremendous economic expansion because the fixed costs of these mines are pretty much in place outside of labor and fuel costs. The general cost of extraction is going to be relatively stable, so falls on the price the metal starts going up. They have huge margin expansion and the stocks go very quickly.
Ed Coyne: I'll just close with one thing, which is in the first half of 2016, gold was up about 20, 25%. Gold equities were up over 130 to 150%. Now they probably got ahead of themselves a little bit, but when that happens, it happens very quickly. So again, focus on the core asset of the physical and look at the price direction of physical to dictate when you move into the equities from a tactical standpoint. So, we're encouraged by that right now, we think there's opportunity there and it's something you have to look at, manage and pay attention to right now.
Remy Blaire: Well Ed, you highlighted a lot of very important points, and indeed we've been seeing gold and equities lock step with each other. So, we'll take a further look later on in the section, but I want to move over to real estate starting with you Ryan. In the [inaudible 00:32:44] economy, we are in a 10-year bull market, so we can ignore that. Investors will continue to keep an eye on mortgage rates as well as other headwinds. So, if you could tell me about the most important attributes when you're considering national and international exposure in real estate?
Ryan Dobratz: Yeah, absolutely. When you look at our fund today, we have about half of our capital invested domestically. The other half invested in select markets and in key gateway cities globally. No matter if we're investing in the U.S. or overseas, we first have to look at the underlying markets and the locations of the properties in which we're investing. One to determine if we think that there are solid growth drivers there from a population standpoint, from an economic standpoint to generate demand for those locations long-term. Then ideally, they're in locations where supply is pretty constrained. So, if you look at where we focus both in the U.S. and overseas, the really supply constrained markets like in New York, like say in San Francisco, London, Hong Kong, Sydney, et cetera. So first and foremost, it's about the location.
Ryan Dobratz: Secondly, if you're looking at international markets, you do have to take it one step further and look to invest in countries where the political climate is relatively stable, where you can have adequate protection in property laws to protect you as an international investor. Then if you're invested in publicly traded or listed real estate like we are, making sure that you're getting the laws that protect you as an outside passive minority investor, as well as getting the disclosures that allow you to appropriately underwrite that security. For that reason, we really have focused in on only a handful of markets because of our desire to own the best real estate, and to own that real estate in markets where we feel comfortable. It's really in the select markets like I said in the UK, in London, in Asia. Mostly in Hong Kong and Singapore and to a lesser extent, Australia. So that's how we think about investing domestically and internationally.
Remy Blaire: In this day and age, we can't ignore geopolitics as well as politics and it does seem as though we're very interconnected on all levels. So Randy, could you give me your general economic outlook for the real estate market?
Randy Anderson: Sure. Well, the general economic outlook for the real estate markets really tied to the overall economy, if you will. It's funny, we haven't really changed our economic forecasts for a long time. I mean first of all, stepping back, people used to ask me when we were coming out of the recession, what this recovery was going to look like? Economists like shapes, so everybody was talking about a V or an L, or a W, or whatever the shape was. I couldn't really think of one because the only thing I could think of was a spout of a gravy bow. We thought it was going to be a long and slow recovery, which we've largely seen. It's one of the longest recoveries on record, but GDP output's only been in about half of what it was in previous recovery. So, we still think that there's some room to run.
Randy Anderson: Our economic forecast is more short term; we call for 3% GDP growth last year came in about 2.9. We talked about though for 19 and 20, and we talked about this a long time ago averaging about one and a half percent which by the way makes stocks at their current price very, very pricey. That's more three, three and a half percent GDP kind of numbers in our modeling. Why low? Well, honestly everybody's come down to our number. We think the probability of recession is low as well, but when you think about slow growth, it's not for a bad reason. The economy is made up about 70% of consumption. Well it's a great thing that everybody's employed, but when people are unemployed and they'd become employed, they buy new outfits, they buy a new car, they move out of their parents' house, they start doubling up and it creates a real multiplier effect for the economy.
Randy Anderson: Once you're at full employment, you start seeing some wage pressure and you see a little bit more savings. We don't get that same multiplier effect, if you will. So, it's very, very hard for an economy that has full employment to grow much faster than that one and a half, 2% range and there's other factors too. We've had some headwinds because of fear of what was going on with the Fed, [inaudible 00:36:43] still even elevated which causes some other problems. We're in a good situation. The economy is fundamentally strong, but we're in a situation where we're talking about one and a half to 2% GDP growth closer to the one and a half percent number. The other interesting thing is it actually goes back to what's happening with interest rates. We also feel and we continue to feel that while the Fed could influence the short rate, and you've seen short rates elevate, the long-term can't be dictated by the Fed. It gets dictated by the markets.
Randy Anderson: If you look at the U.S. tenure treasury and you compare it to the equivalent tenure treasuries across the globe, that delta is about as big as it's ever been. It's about 230 basis points higher. So, the markets are looking, you got to really liquid, really safe, really secure treasury market. It's really hard for that long end to go up, and now with the Fed even easing and the expectations about growth being not three and four and 5%, but that 2% number where we are with respect to a moderate low rate growth in the economy, but yet moderate in terms of where interest rates are going to go I think is what we're looking at for the next couple of years.
Remy Blaire: Well I think we've set the stage to move on to our next part of this discussion, which is investing. We've covered fundamentals, so let's start out with gold. There are different ways to purchase gold. You can buy an ETF, or you could purchase the physical gold, or even futures are options. So, Juan Carlos, what do you think is the best way to invest in gold?
Juan Artigas: I think that there is no single best way, I think that there are many good ways to invest depending on the objectives of the investor. As you were saying, basically the investors have a myriad of options that they can choose to invest in gold. Whether it's gold back ETF's, bars and coins, the futures markets or also through mining companies. Many of these are complimentary and it really depends on the objectives of the investors. For many investors as Ed was saying before, gold back ETFs have been an easy way to access the market, but that's the only one. Again, people continue to buy bars and coins is like a really healthy and big market, and many institutional investors and those that can use leverage may be investing in [inaudible 00:38:45] or other things. Again, many investors can complement some of the exposure through goldmine companies.
Remy Blaire: Ed, what percentage should gold represent in a portfolio, and could you tell me why you think this?
Ed Coyne: Sure. A real gold guy would say 100%, but a practical if I want to get invited back to a meeting or to an event, you have to really look at some work that actually World Gold Council has done, which I think is really quite brilliant in that it's not a simple answer of 5% or 8%. You really have to look at what the overall portfolio looks like, right? So, your stock demand allocation, the type of client you are, what you're looking for, are you more about preservation versus appreciation? What are you really trying to accomplish when you allocate a portion of your capital to gold? Now having said that, we looked at the entire bandwidth of what's the most productive allocation relative to a stock or bond portfolio. If you take say an 80/20 portfolio of 80% stocks, 20% bonds, then somewhere in the eight to 10% range is probably appropriate to help dampen that volatility, but yet still enhance the risk adjusted rates of return.
Ed Coyne: That has proven itself out from return pattern standpoint. Conversely, if you have a very conservative portfolio and it's more about preservation of capital, well we were surprised to find that as an 80% weighted portfolio into bonds, and a 20% weighted portfolio into stocks as little as two or 3% still added value to the overall portfolio, still dampen volatility and still enhance a risk adjusted rate of return. So that's actually part one of the equation. That's really the equation of talking about gold as a core allocation. Regardless of where we are in the market cycle, regardless of where we are in the economic cycle, if you manage your gold allocation appropriately, and I'll touch on that in a second, it's one of the better performing diversifiers out there, period. When you think about what it does from return pattern standpoint, it has a very low in some cases negative correlation to the market.
Ed Coyne: If you think about what alternatives are designed to do, they're designed to perform differently than stocks and bonds. Few things do as well as gold does. So, when you think about that return, you have to manage that allocation though, because gold like Buffett says, doesn't do anything. Doesn't pay a dividend, doesn't have earnings and so forth. That's good and that's bad. That's good because it's not supposed to. It sits there, and it protects the value of stocks that pay dividends. It protects the value of real estate that pays income. That's what gold's job is to do. So, in years like last year where gold held up a couple hundred basis points better than the S&P, in that particular environment, we're advising our clients to trim your gold position and add it into equities. Conversely, in years when the S&P substantially like this year is outperforming gold, we would advise to do the opposite to maintain that 5% allocation, because you're not getting reinvestments in dividends. You have to manage that allocation and keep it in a particular bucket, whether it's five or 8%.
Ed Coyne: So that's part one, the core allocation. Part two then would be a course of the equity allocation. If you want to be more opportunistic and you're more about appreciation of your capital, you do have to have some equity exposure in there but again, you're going to take it from the direction of the price of the physical metal first. If you're going to have a combination of both physical and equities, then I would say you're going to be probably closer to the 10% range from a diversification standpoint. So, I like to start with 5% as a core allocation in the physical. As you add in, more than 5% that's where you start to pepper in or salt in the equity part of the portfolio. In 10, max probably 15 but realistically, probably 10 is really where you'd want to go. You don't want to get over your skis on this because we all know that gold equities, particularly gold equities can be very volatile.
Ed Coyne: So you really have to think about that from a weighting standpoint, but it goes back to what's your stock and bond portfolio look like. Then from there, that will dictate your weighting in the portfolio.
Juan Carlos Artigas: If I can weigh in just really quickly on something that Ed was saying that I think is relevant is, actually the research that we've done shows that to some degree gold is complimenting your bond exposure. People don't necessarily think about gold that way, but actually it is. It's compensating some of the risk I mean especially as you move up the curve. Another interesting result is that these general two to 10% range for gold allocation actually applies to investors around the world. So, we're talking right now about a U.S. investor, but if you look at a UK GDP based investor or a European investor, the percentage of gold that would help diversify a well balanced portfolio is going to be also more or less within that range, which is again, very, very interesting. It tells you about the global nature and the global relevance of gold, not just for one market, but truly for global markets.
Remy Blaire: Well, I think you've provided some very important insights as well as examples, Ed and Juan Carlos. So, let's a move over to real estate now Randy, as well as a Ryan. If you could give me some of your insights on both public and private real estate as well as direct real estate. Could you give us a little bit of insight into what you're seeing right now?
Ryan Dobratz: Yeah, maybe Randy-
Randy Anderson: Go ahead.
Ryan Dobratz: In terms of private versus public, there are certain advantages to being a direct real estate investor and that's primarily control. You can control the timing of financings, sales, et cetera. However, there are big advantages of being in public real estate companies as well that we've talked about in terms of having access to assets and management teams that you would otherwise not be able to access and being able to buy it cheap. This is a very interesting time to talk about public versus private, because real estate has performed really well in a lot of cases over the past call it nine to 10 years. As a result of that, there's been a lot of private equity capital raised to invest in real estate. In fact, there's more than $330 billions of dry powder sitting on the sidelines waiting to be put to work over the next three to five years. That's going to be very challenging to put to work and be able to earn excess returns.
Ryan Dobratz: So we think that ultimately that private equity capital, it has to target the public markets. The public markets if you're invested in the right places, are trading at pretty significant discounts to private market value because we have big investments in the UK, which is at a favor, Hong Kong, a lot of family-controlled business, the U.S. residential markets are under earning. Our portfolio is trading on average we think at a 25% discount to private market values. So we think it's a great time to have exposure to public real estate, because there's so much capital on the private side that it has to be put to work, and because of how much capital is out there, it's probably going to look to target some of these public companies and we can see a lot of consolidation like you talked about in the gold space, where a lot of the smaller to medium sized companies get rolled up in the process.
Randy Anderson: To the same question, Ryan makes some great points. It's interesting I'm a recovering academic, so all the research shows that you should really access real estate in both ways. A combination of public and private real estate over time maximizes your risk adjusted returns and the sharp ratio if you will, putting those things together. So, on the private side, you can invest in some vehicles that have low levels of leverage, invest in best properties and best markets, it's very institutional. They do quite well and has low volatility, and they always sort of trade at NAV. It's at the net asset value and that's great. You can move along and do really well, and it should be a strong part of a portfolio. It's quite frankly why a lot of institutions invest that way. The beautiful thing too though is you can also invest in publicly trade rates in the real estate side as well.
Randy Anderson: The publicly trade markets sometimes doesn't trade it, it's not asset value for different reasons. The markets get dislocated. It's a small market, it's like two and a half Facebooks, so the publicly traded read market is very, very small and because of that and because of the generalist, a lot of times people will move money into the bond market, or they'll get excited and move it into the stock market and all of a sudden, the value of the underlying properties is 100 and you can buy it for 75. I love the trade ins $75 for $100 when that opportunity comes into play. The example really is over the last couple of years, in 17 and 18, the read market sat flat but the private market kept growing. So, all of a sudden, you could step in by high quality real estate and high-quality markets, great management teams as you talked about. We saw those values recovered backup to their net asset value.
Randy Anderson: Being able to go between public and private is very helpful. You can also go up and down the capital stack. So, there's also opportunities to invest in debt. So if you think the equity is getting a little pricey, you could by senior debt with a little bit of leverage, or maybe some unleveraged mez pieces and get a nice sort of six, 7% return, and you have some real equity sitting above you now because lending is much more in check than it was back during 2007 as well. If you ever get to a real challenging time, really core senior loans both private and through the securitized market actually held up and did really well during the global financial crisis. So, there's lots of ways to access real estate in the marketplace, and a combination of public and private, and a combination of debt and equity will help you navigate through different market conditions.
Remy Blaire: As we look ahead, we're here in the second quarter of 2019. For the time being, we know where the Fed stands, but as we head into the rest of the year, we'll have to keep an eye on what happens to the U.S. economy, the global economy. So, let's talk about the outlook for gold and real estate. So, if Juan Carlos, yeah, you've given us your perspective on the Fed, but how do you expect that to impact gold and what else are you paying attention to as we head into the rest of this year?
Juan Carlos Artigas: Yeah, as I was saying before, monetary policy and the direction of the U.S. dollar is something important to gauge and to monitor this year. Actually, the fact that the Fed moved from tightening to neutral, to a neutral stance has been relatively positive for the gold market. Why? Because it lowers the opportunity cost of investing in gold. So, if rates continue to go up, then people say well, I can put some more money into the bank as opposed to something else. That something else can be gold. So, the opportunity cost kind of gets reduced. What is interesting and something that is quite important, and we were alluding to it and Ed was alluding to before, is that we were going from path that was very well telegraphed or tightening rates last time. People come like, you know the market was understanding what the market, what the Feds was going to do.
Juan Carlos Artigas: When we shifted from that into a neutral stance, there is more variability, right? There's less certainty about what the Fed may do. Now there's a chance that they may cut the markets pricing, a small but still significant chance of about 30% of a cut. Some people may feel that most likely they'll stay in neutral and or go up. Long story short, for gold, all in all, we think that this is like a positive sign in part because it's maintaining rates at a consistent pace. There's also not a strong perspective that the dollar will appreciate a lot in this environment, and we can focus on the other aspects like risk and capital preservation as we were alluding to before.
Remy Blaire: Ed, do you have anything to add to Juan Carlos?
Ed Coyne: I would just say the market hates uncertainty and gold loves it, right? So, as we get into the second half of this year, there's a lot of uncertainty out there, right? We got elections coming up next year. We've got a lot of things happening here and abroad, both from an economic standpoint but also from a geopolitical standpoint. Geopolitical stuff really just moves the price of gold, does not really gives you a directional long-term outlook for gold, but it does give you opportunities to buy or sell into the space. A lot of uncertainty is going to continue to grow I think, and we all talk about debt a lot to the point to where you've got people in different parts of the country in government say, well that's not a problem. We just print up more money, we pay off the debt and we're fine. That's fine if we're a closed-circuit economy, but we're an open circuit economy and you can't just print your way out of these debt levels.
Ed Coyne: So there's clearly something afoot that's happening here, and there is some uncertainty that's starting to build its way into the market. I think an asset like gold is a very simple way to allocate a portion of capital away from the market. So, we're encouraged by that. We like the fact that there is uncertainty right now in the market. We don't want the market to go down. I personally don't want the market to go down, you know the bulk of my net worth's in stocks and not really bonds, but stocks and real estate. I have a house I live in and children, and so I went to market to keep going as well, but I know it doesn't go straight up forever. Buffett always likes to knock on gold, because he's got a couple of great quotes on gold. One is, why do you spend money to dig it up, and then you dig another hole to put it back in the ground to save it. It doesn't pay, it doesn't do anything.
Ed Coyne: If you think about its role and what it's supposed to do, I'm not telling people to go and sell everything and go to cash. You need to stay in the market to grow your net worth. We all know that, right? Gold allows you to do that, and that's the thing I think Buffett always forgets is that you can't compare gold to the S&P, you can't compare gold to one of his companies. It's there to protect the value that those companies are producing. So, if people change their mindset about how to think about gold, we don't need the world to come to an end for gold to do well, right? We just need uncertainty to be a common theme in the market, which I think we're getting for gold to really be a productive asset. So, I think that's going to continue, and I think as we go down the next couple quarters, that uncertainty is probably going to scream louder than it has in the past.
Remy Blaire: Well I think you've helped us understand how risk affects gold. So, what about in real estate, Randy and Ryan? I'm sure there are other factors that affect the real estate market and given all the extreme weather we've seen recently, that might be something of concern as well?
Randy Anderson: Well, it's interesting some other factors that affect real estate, the extreme weather is certainly interesting for all kinds of alternatives like insurance link products and whatnot. It also affects the construction cycle, which really probably it brings up a point a to touch upon. I'll go back a little bit to the election too, which is interesting. In real estate, you want good, strong supply and demand fundamentals. So, the weather makes it tough to build, but I tell you what's making it really hard to build is the cost of land has gone up. The cost of labor has gone up and now because of some of the geopolitical rest, rolled steel prices have really gone up. So, it's really hard to build a building at the same price that you used to build them before. So, a lot of deals aren't penciling out.
Randy Anderson: While the Fed's very frustrated with inflation, the construction cost inflation is going way up, so we're not really seeing a lot of supply come to the marketplace. On the demand side, which is interesting is even though we've got a little bit of slow growth, it's really hard to think about a recession. We have a Fed who's now going to be very supportive, if you will, perhaps even dovish. They really did a 180 after some famous words of nowhere near neutral in the market sort of got wrecked because of it, but we have a presidential election year and this was not a political statement pro or con, but the platform that the Republicans and Donald Trump will run on is a strong economy. There's really a good fundamental data that shows what increases the probability of election way higher than the stock market is actually what's going on the real economy. What's happened with GDP, what's happening with jobs, what's happening with consumer confidence?
Randy Anderson: Therefore, the leaders of fiscal polls are going to do everything they can with a dovish Fed, keeping a low probability of recession coming in play. So, we feel like there's demand drivers in place all be at moderate, they are going to be good for real estate and a combination of a low level of supply, which would keep us in a nice balance and be able to kick returns off. What I will say in general with respect to risk, and gold is a very different asset class and a very good diversifier, but when you think about just like equities in general, say the stock market. You're not going to see multiple expansion in a market that's growing in one and a half, 2%. So, the companies are going to do well, they're going to grow their earnings. Like in the metals, you've got to see the price of the underlying commodity grow before the company grows. Well, same with equities. On real estate, if the fundamentals are good, you can actually see real world growth and so it depends on what kind of real estate you want to buy.
Randy Anderson: Going back to retail, if some of those retail assets aren't generating the income because of online sales, but industrial is, you need to rotate there. Triple net lease properties that really don't see a lot of growth, that could be more challenging unless they got rental growth built into them. So, you want to focus on markets and asset types where you can see rental growth, because the inverse of multiple expansion is cap rate compression in real estate. It's the same thing, only the inverse. Cap rates aren't getting any lower, so you're not going to grow your levels of real estate value through just people throwing more money at real estate. It's going to be by income growth, market selection and old school asset management getting to the right assets in the right place, and then you'll see value creation I think over time.
Remy Blaire: Ryan, do you have anything to add to Randy's comments?
Ryan Dobratz: Yeah, I mean in terms of some things that we're focused on for 2019 headed in 2020, continue to be very mindful of interest rates. The impact that that has on cap rates and property values, and continuing to have a portfolio that we think can protect capital in a rising rate environment and potentially even benefiting from it, and it's really shying away from some of those areas that were mentioned as ones that wouldn't perform that well in a rising rate environment like net lease, potentially some healthcare and focusing on property types with shorter duration, more pricing power, et cetera. So that remains top of mind. In addition to that, we're watching some tax changes in the U.S. there's been a lot of publicity about opportunity zones, the ability to reap tax benefits by investing in these areas mindful of whether or not that could introduce some uneconomical supply, because supply has been very tame for a few different reasons but that's something that we're watching.
Ryan Dobratz: In addition, we're also cognizant of the environmental impact of real estate, not only the weather-related incidents that you're talking about, but just the carbon emissions, the carbon footprint that commercial real estate is responsible for. We think that there is going to be a lot of push to change that, and you could see older properties become obsolescent very quickly or not economical. That could impact property values in a big way. So those are a few things that we're certainly spending a lot of time thinking about as we finish this here and go into 2020.
Remy Blaire: Gentlemen, last but not least, I want to open the floor up to all of you and discuss how technology is going to affect investing in gold as well as in real estate. We know that technology, whether we're talking about digital currencies or the tokenization of investing in real estate, those trends are on the horizon and people are paying attention to them. How do you see those trends affecting these assets going forward?
Randy Anderson: I can start. Real quickly, Sprott, we're a publicly traded company and we have cash in our balance sheets, and we invest in a lot of these tokenized companies that have digitized gold. If you think about what the craze that happened in Bitcoin over the last couple of years, the Block chain is changing really the dynamics of everything. From how you close on a house, to what currency actually is. We have a suite of companies that we've invested in that have allowed you to digitize gold where you can actually own the physical metal, and also charge it on a credit card payment type of system and it becomes cash. So, in the U.S. that may not sound that interesting, but if you live in Venezuela, it's very interesting, right? So somewhere between the U.S. and Venezuela, there's a unique opportunity out there to actually turn gold back to what it once was, which was a true currency.
Randy Anderson: Funny enough, gold is one of these archaic metals that people think about and make fun of a lot, but the reality is through Block chain technology is bringing it to the forefront, and really looking at it as an alternative currency as a way to settle goods and services and transactions. So, we are heavily invested in about half a dozen now different companies, whether it's on the Block chain side, direct consumer side, the credit card payment system side. We have our hands in a lot of different businesses right now, and some of these businesses are starting to get to sail evaluations in the private market because people are excited about it. So, I think that's something that you're going to see change the face of precious metals in general is the Block chain technology as the world catches up to it, is going to make gold much more relevant as a currency. Not as the currency but as a currency and settling in buying of goods and services. So, I think that's something that's going to be interesting long term. It's something worth paying attention to.
Juan Carlos Artigas: Thinking about actually another perspective as well is just the use of gold in technology. There is about 10% or so of annual demand that goes to technology. So, applications high end electronics and the more our homes become smarter, and like the Internet of things and vehicles become electric and more automated and so on, there's also more demand for gold and gold components into that. As I was saying before actually, one thing that is perhaps well understood by most investors is this perspective of gold and risk. There's also this perspective between gold and economic growth. So as economy expand as we start to grow, as the global economy grows as there is more use of technology, that will also be relevant and has been relevant for gold for some time and continues to be an important area of growth.
Remy Blaire: Great insight there. Now what about in real estate?
Randy Anderson: Real estate's interesting. I want to step back and say something that's interesting. Technology actually is a fundamental instructional shift. There's a lot of things that people have talked about in real estate over the years that are driven by the state of the economy. So, one thing on the housing market, if you go back to 2007 and eight, everybody said nobody wants a big house anymore. They're all going to be 1,500 square feet with stamp concrete and be green, but the truth is the American dream is still having a giant house to impress people that don't care about you. The second thing is that people didn't actually want an office anymore. They didn't care about the corner office, but if you ask people if they really love the idea of free addressing where you don't have a place to put your pictures and your books and whatnot, they really don't. They still like a place to come to, and they still like and aspire it at some level to the corner office.
Randy Anderson: With all that said, technology is here and it's changing the way that people are doing business, and you really need to adopt your real estate and your real estate portfolio to understand what works and what doesn't work. There are some types of retail real estate That probably just doesn't make sense to be in a sticks and bricks store anymore, but there's certainly some that does, and maybe even having an increasing demand. There certainly is a different way that office is being configured. There's a different way that office is being used because of changes in technology. The old idea of being just diversified because that makes up the retail industrial office in multifamily mix of real estate, doesn't necessarily make sense in a new technology type world. So, we have to look at where the drivers are going and fundamentally something has changed. Technology is here and it's going to increase.
Randy Anderson: So when it's retail, it's going to have to be experiential. It has to be something that you can't replace. Industrial, the whole tenant mix is going to change. It's great in a lot of ways, but industrial is also going to be whippier. So, when the economy changes, you're going to have tech companies as opposed to maybe manufacturing companies as your tenants, and people don't really think about that. It seems like it's in the early parts of the cycle which it is, but there's a different level of risks that you're taking into your portfolio. The idea of corporate travel is also interesting. There's some pros of changes in technology because of hoteling, but there's also that you can travel less through video conferencing and changing. So, you really still need to stick to the core supply and demand fundamentals, but every time you look at demand and supply, it's got to be with the lens at different property types, different markets. Different users will ultimately be impacted differently by that change in technology and got to make sure you adopt that real estate still remains relevant in your portfolio.
Remy Blaire: Last but not least.
Ryan Dobratz: Technology has certainly introduced some nontraditional property types to the equation. I mean, we're seeing some investors target cell towers as well as data centers. They've been very popular but as long-term value investors we’re very cautious on those types of investments. They trade at 25 to 30 times cash flow, and there's significant technological obsolescence risk with those types of investments. You don't even know if the technology is going to be the same in five to seven years. So, we've shied away from those and instead, really focused in on great locations that can benefit from some of the drivers that were mentioned earlier. Co-working can drive rents to higher levels at the right office locations.
Ryan Dobratz: Industrial is certainly benefiting on multiple fronts. There are some retail locations that are actually going to be big winners of this, because they're not only benefiting from tertiary properties going offline, but some of the online retailers are opening up stores to interact with their customers. Department stores and parking garages are going away, giving rise to alternative uses. So, if you're in the right locations, technology can certainly be to your benefit, and that's how we're positioning the fund in terms of technology today.
Remy Blaire: Okay. Gentleman, well, thank you so much for joining me today. It was such a great conversation, and I'm sure that the viewer has got a lot of insights into trends we're seeing in real assets.
Ryan Dobratz: Thank you, thank you for having us.
Remy Blaire: Thank you for watching The Real Assets Masterclass. I was joined by Ed Coyne, Executive VP of National Sales at Sprott Asset Management. Juan Carlos Artigas, Director of Investment Research at the World Gold Council. Ryan Dobratz, Lead Portfolio Manager of Real Estate at Third Avenue Management and Dr. Randy Anderson, President and Chief Economist at Griffin Capital Asset Management. From our studios in New York City, I'm Remy Blaire for Asset TV.