Return of capital beats return on capital

As market uncertainty persists amid rising interest rates, inflation, and economic volatility, investors are seeking strategies to protect and grow their wealth. Tackling these challenges head on is essential for Richard Saperstein, managing director, principal, and chief investment officer at Treasury Partners.

“The biggest issues are more specific to the stock market,” Saperstein said. “In particular, we've had a long-standing overweight in US versus non-US developed markets, along with an overweight to large-cap technology stocks.”

Despite concerns over technology valuations, Saperstein sees strong growth potential.

“Yes, we do think tech is overvalued, yet we continue to stay with it because that's where the largest growth is in the S&P 500,” he said.

And with two consecutive strong years in equities, rebalancing allocation is a priority for Saperstein, who emphasizes the importance of return of capital to investors.

“We constantly review client asset allocations, and we've had two very strong years in the stock market, so some clients are now overweight equities,” Saperstein added. “What we typically do in that case is to rebalance the portfolios, because for most of our clients, the return of capital is more important than the return on capital.”

In a volatile economic environment, liquidity management is critical to Saperstein. This year, with the new administration, he believes it will be very episodic and have a choppy impact on both the debt and equity markets.

“Coupled with the fact that credit spreads are very tight, we're not taking a lot of credit bets, but we're managing duration right now,” he said. “We’re being very selective when we extend maturities for all of our clients, both our corporate cash clients, as well as our private clients.”

Several structural shifts are influencing investment strategies. According to Saperstein, there seems to be a very large push in the investment industry to utilize alternative investments, but Saperstein and his team at Treasury Partners are minimizing their use of alternatives.

“I think investors should think about what the actual after-tax return on alternatives is, on a liquidity-adjusted basis,” he said. “We believe there is superior opportunity in the municipal bond market, which offers liquidity and currently, the opportunity to earn a 4% tax-free yield.”

Another major shift is the growing use of exchange-traded funds (ETFs) and indexing, according to Saperstein.

“The increased use of ETFs and indexing for many asset classes is proving to be the most efficient and effective manner to get exposure to certain asset classes,” Saperstein says. “Primarily, we're seeing that in the large-cap space, and we believe investors should consider a combination of active and passive ETFs in their portfolio.”