There’s still plenty of room for REITs to grow in client portfolios, says Neil Menard, group president of CNL Capital Markets and president of CNL Securities, but it requires innovation in the product.
Menard tells Money Management Executive that CNL sees an opportunity to calibrate REITs so that they focus on markets serving millennials and the elderly. “We think there’s still a big market for REITs,” he says. “It’s how you deliver it to our market that is going to change.”
In the second part of his interview, Menard expands on the firm’s strategy toward product innovation and what business it won’t pursue — CNL, for instance, will not follow other asset managers which are developing robo advice platforms for advisers.
Has CNL factored the potential liability of broker-dealers facing claims related to the use of your products?
Well their job is to do the due diligence, right? We’re perceived as having deep pockets, so we’re always on the hook. But yes, we think about that all of the time. Our job is to protect the firm.
One of the things we take very seriously is that we’re stewards of our investors’ money. We wouldn’t have been here for as long as we have if we didn’t take that seriously.
In fact, an event [we] put together every year is called our Cupola Awards. One of the interesting things about it is that all of the associates come, and on everyone’s table were pictures of firemen, retirees and teachers.
The reason that was there is because our CEO stood up and said, “Let me tell you why there are people on your tables that you don’t know. These are our clients, and if we never lose sight of the fact that they are our clients, we are going to continue to do well in our marketplace.”
It’s their money we are taking care of. Not some nameless, faceless, person.
But what could be the scattershot effect of a legal challenge? Everyone knows attorneys think this is great.
It’s a panacea for the plaintiff’s attorney, right? It really opens up the liability factor and I think that’s all being assessed, which thank god we have until 2018 to figure it out.
What’s your firm’s perspective on REITs regarding the DoL rule? Are there adjustments needed to be made?
So, let me tell you what they are. One of the responses that you’ll see from us is that we have launched REITs now that are going to have A shares, which are the traditionally loaded T shares, which are that trail, but we really think that the business is going to this fee-based world and the RIA world, and there’s a migration already. So, we’ve built I Shares.
I Shares are completely stripped down. They are our institutional shares and we think we are going to see some growth from that front. In the REIT business, that’s how we are responding to that.
We think, by the way, that there is massive opportunity today in really two sectors of REITs — for multifamily housing, we think that with the millennials who don’t want to own anything, and the baby boomers who want to have some place near their grandkids. While there’s a shortage of them, there are hundreds of thousands of units.
You have got to build them in the right cities and they’re more suburban, garden level, nice clubhouses, nice pools types of places. We think there’s a big market for that. And then health care, with the aging baby boomers, we think is going to continue to be massive stocks.
So, assisted living centers?
I would say senior living more than assisted — so medical office buildings and hospitals, and to some extent, surgical centers.
So we think there’s a good opportunity there. We think there’s still a big market for REITs. It’s how you deliver it to our market that is going to change. So, we have adjusted that to involve both the T share and the I share.
Since you mentioned the credit markets, in the low interest rate environment, are there any adjustments to products that need to be made?
I don’t think so. I think we’re very well positioned for what’s a good market for us now, and then as interest rates rise, our products would act as a hedge to rising interest rates because we can do things on a floating rate basis. And rates continue to stay low.
I heard yesterday, and I heard it again today… by June there will be another 25 basis points, but I don’t know what kind of affect that’s going to have. It’s not like they’re going to raise it five times in a row, because if they did that they are going to crush Europe.
We’ve checked the unemployment box. Now we have to look more globally.
There’s at least a realization now that if you have a platform, not only can you create an alternative route for distribution for your product, but you also then you can also become a tech provider to all these firms. Is that something your firm has considered?
I think we’ll develop a product for the robo adviser, but I don’t think we are going to get into that marketplace. It’s not what we do. I think it would be a cool solution to have an institutional solution to market to advisers, but that’s not our business.
How would you see an alternative solution in a robo adviser, considering the costs would have to be at zero, or below zero?
I don’t think it has to be at zero. I think you get what you pay for. As long as you’re adding value and as long as you can execute it simply, I don’t think you are going to get true alternatives in an index wrapper. In fact, I’m not a big fan of liquid alternatives because I’m not sure that they delivered on anything.
I built one — a managed futures mutual fund — and I ought to tell you that the complexities in those products, under the hood, are frightening, but yet because they’re a mutual fund they’re OK.
I’m just not a big fan of liquid alternatives. I just don’t think they can deliver on the promise that the true alternatives, the illiquid alternatives, can. And then they would have to be correlated; so semi liquid alternatives.
What you would never want is your alternatives manager to be a forced seller in a buyer’s market, and in a mutual fund in which you are managing liquidity, you are always going to be a forced seller.
We’re seeing that in the high yield bond market, we’re seeing it in the bank loan bond market; those guys are forced sellers. That’s never a place that you want to be. You want to hold a good debt until it matures, rather than selling it at a discount to somebody else who is going to hold it until it matures. I don’t think that works.
Do you feel your firm needs to come up with an innovative product?
I think we do need to be innovative in both the product we’re allowed and the wrapper we put it in. Our goal will probably be to continue to serve the mass affluent marketplace, but we need to be creative in the wrapper. We’re looking at a lot of that stuff.
We’ve gone out and hired an executive from J.P. Morgan, who was on their financial institutions group and who knows every asset manager, to start looking at different asset managers in different wrappers to put them in.
A lot of them want to do what they want to do, but serve the marketplace with the right risk tolerance and the right risk features that we want to push into the marketplace.
What is your take on diffusion as an industry trend right now?
This is part of the global macro trends that I see in the industry, which are the institutions playing in the retail space. And why, you ask? It’s because there’s money there. So, the lines are getting blurry where they used to not be.
Do you think it’s a good thing that much of the market innovation is focused on the drive toward serving the mass affluent market?
I think it will create competitiveness, I think it will create a focus on delivering, and not that there wasn’t already, but a focus on good performance. There’s going to be a focus on transparency, and in the end, I think it is good.
Competition makes us all better, right? It especially does when it comes in the form of the big guys.