U.S. household net worth has exploded to US150-trillion from US$17-trillion in 1980. BofA Securities equity and quant strategists Ohsung Kwon and Savita Subramanian note that the Baby Boomer generation was the prime beneficiary of the trend and this implies specific opportunities, and pitfalls, for investors.
Boomers (born 1946-1964) and the Traditionalists (born 1922-1945) own an estimated two-thirds of U.S. net worth, primarily in the form of non-real estate financial assets. Proprietary Bank of America data shows that these two generations are the only cohorts to have increased consumption during the third quarter of 2023.
The U.S. Boomers focus spending on health care, entertainment and home improvement. In surveys, travel was identified as the top consumption priority. For Millennials, whose spending has lagged significantly, the primary outlays was on apparel and shelter. Younger Millennials (30-39) are the only age group where credit card delinquencies are higher than pre-COVID.
Mr. Kwon and Ms. Subramanian uncovered five stock opportunities arising from these demographic trends. The four long ideas are luxury homebuilder Toll Brothers Inc. (TOL-N), senior living specialist Welltower Inc. (WELL-N), funeral home owner Service Corp. International (SCI-N) and American Express Co. (AXP-N). The short idea is designer fashion firm Revolve Group Inc. (RVLV-N)
American Express is listed because Boomers account for 33 per cent of total card billings, roughly the same share as Millennials and Gen Z combined. Also, American Express specializes in travel and entertainment, two priorities for Boomers.
Toll Brothers specializes in luxury homes where Baby Boomers still dominate. The company’s share price has historically been correlated with total household net worth, which continues to rise quickly. Management has also noticed a distinct increase in parents financially supporting their children’s first home purchase.
Demographic trends move slowly so there’s no need for investors to rush out and implement these stock ideas immediately. Over time, however, if the picks begin to perform, or market volatility provides an opportunity to buy them at steep discounts to historical valuation levels, investors might want to add them to their portfolios.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I own units in the Romspen Mortgage Investment Fund and am over 80 years of age. Monthly distributions have been slashed and redemptions have been suspended since last November, and I can’t sell my units on the public market because it’s a private fund. How can the fair market value of the units be determined when I pass away if redemptions are still not permitted?
Answer: Romspen operates in a corner of the commercial mortgage lending market that has been hit especially hard by the pandemic and the sharp rise in interest rates. The company, which specializes in construction and predevelopment lending, is facing a liquidity crunch because loan repayments have slowed dramatically. To preserve cash, Romspen has frozen redemptions and announced several cuts to its monthly distribution, which is now two cents per unit, down from seven cents in October, 2021.
This has dealt a blow to unitholders, including many retirees, who flocked to Romspen during better times when it was offering yields that beat the puny returns available on bonds and guaranteed investment certificates.
Now, I’ll address your question about valuing the units. Although there is no public market for the securities, Romspen provides an estimate of the fund’s net asset value on its website each month. In September, the NAV per unit was $9.719. I doubt you would get anything close to that if you were able to sell your units, but Romspen says the NAV – essentially the fund’s assets minus its liabilities – is an accurate reflection of its unit value.
“Although there is not an active public market for such assets as compared to funds that invest in marketable securities, when determining the fair value of any particular mortgage investment, management relies on third-party appraisals and valuations of the underlying real estate collateral, the overall financial strength of the borrower, local market conditions, loan history, and the state of interest rates and real estate credit markets, among other things,” Romspen said in an e-mailed statement.
“While it is reasonable to use the fund’s published NAV as a basis for determining the deemed proceeds of disposition … in estate scenarios, we recommend that unitholders and their representatives consult their own tax advisors.”
The statement added that “Romspen’s investor relations team has considerable experience assisting unitholders and their families with estate situations, and we encourage the investor to reach out to us directly so that we can help with their specific situation.”
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
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David Berman takes a look at what’s driving down the share price of Brookfield Infrastructure, and why analysts are downgrading the stock without giving up on it.
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Compiled by Globe Investor Staff