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Asset Classes to Avoid



November 30, 2012 – Comments (0)

Board: Macro Economics

Author: yodaorange

Normally Yoda does NOT take a hard sell approach for or against any asset class. Many asset classes might work for some investors in some situations. On occasion, an asset class appears that is a poor choice for most investors in most situations.

The top of the “Avoid” list are tax deferred annuities pushed on seniors. They are widely sold with poor understanding by the investors. I am sure it is purely coincidental that these annuities typically offer the highest commission to the “financial advisers.” I have posted my negative views about these before. This is not to say that in some circumstances for some investors, annuities are a good fit. In the many cases I have seen, the good fits are the exception instead of the rule.

Second on the “Avoid” list are “Non-Traded REITs.” Nominally these are the same as publicly traded REITS that we discuss over on the REIT board. A REIT sells some stock, and then invests the proceeds in properties. Rent payments are returned back to investors as dividends. Publicly traded REITs have been an outstanding asset class, for the last 1, 3, 5 and 10 years. You can buy individual issues or any number of mutual funds/ETFs to own the industry.

Non-traded REITs are a little different. As the name implies, they are NOT traded on any stock exchange. If you decide to sell your shares for any reason, there literally might NOT be any buyer willing and able to buy them at any price. Recently, one REIT sponsor, David Lerner, has come under attack by FINRA for selling “Apple” REITs 1 through 10. Apple REITs are offered exclusively by Lerner. Without going into detail, like many annuities, these were sold to ill-informed, unsuspecting seniors that did NOT understand their illiquid nature. I did a post on the REIT board that documents how FINRA ruled 100% against Lerner in an arbitration case.[1] I am sure again that it is entirely coincidental that non-traded REITs offer the second highest sales commission. Once again, there are some good ones that might fit some investors some of the time, but it is not the norm.

Today, Yoda is adding a NEW asset class to the “Avoid” list. It is “Non-traded BDC’s” or Business Development Companies. It seems that some of the non-traded REIT companies see a market demand to offer non-traded BDC’s. Once again, there are publicly traded BDC’s. Unfortunately, the largest and best known two blew up in the crash. One was Allied Capital that got bought out for pennies on the dollar by Ares Capital in 2010. The other one, American Capital (ACAS) trades for ~20% of its pre-crash peak. It has not paid a dividend since 2009. So the publicly traded BDC class is on shaky ground to begin with. Couple that with adding a non-traded wrapper around it and I am not optimistic. I am going to wildly speculate that they also offer high commissions to the sales team. To be clear, since this is a brand new asset class, I have zero detailed knowledge of the offerings, the management teams or what hotel they stayed in last night. (Holiday Inn hopefully.) The sole basis for inclusion in the “Avoid” list is that any asset class associated with non-traded REITS is genetically placed on the Avoid list.

Investment News has the details on the offerings. [2]

BTW, you might ask what is driving the sales of these three asset classes. A lot of it is searching for yield by seniors. Annuities are misleadingly sold as having “guaranteed” returns in the ~ 7% range. Non-traded REITs are sold with similar yield promises. I suspect the non-traded BDC’s will also be advertised with high yields. The Fed is achieving its goal of pushing investments into “risk assets” instead of 5% CDs. I re-watched the television ad from the campaign. You know, the one with the man pushing the little old lady in the wheelchair over the cliff. On further inspection, I realized it was Ben Bernanke doing the pushing. Mission accomplished Ben.



[1} Yodaorange REIT board post on Apple REITs

[2] Investment News article on Non-traded BDC’s

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