Alternative Assets

Six Alternative Assets This $3.5B RIA Uses To Diversify Client Portfolios

FA Magazine, by Christopher Robbins, July 31, 2018

With clients demanding income from their portfolios, Paul Pagnato has turned to alternatives.

Pagnato, founder and CEO of PagnatoKarp, a $3.5 billion¹ RIA based in Reston, Va., said his average client has between 25 percent and 35 percent of their portfolios in alternative investments.

“We allocate to alts from both equity and fixed income,” said Pagnato. “How much we allocate really depends on the risk tolerance of the client, their cash flow needs, our perspective on the capital markets and our tactical overlay. It’s a combination of factors.”

For clients who need more cash flow, alternative allocations are usually carved out of the equity portion of their portfolio, said Pagnato, while those who desire more growth will have alternative allocations built in lieu of fixed income.

Pagnato, who will speak at the 9th Annual Inside Alternatives and Asset Allocation Conference from Sept. 24 to Sept. 25 at the Wynn Las Vegas, named six alternative investment opportunities that he offers to clients that are providing differentiated sources of income and returns:

Reinsurance

Reinsurance allows individual investors to benefit from insurance arbitrage, said Pagnato.

“Insurance companies make money based on premiums that are collected, minus the funds they have to pay out based on casualties,” he said. “Now the individual investor can participate in that. Whether they’re successful or not has more to do with hurricanes, tornados and other natural disasters and has a minimum bearing on whether the stock market is going up or down.”

With reinsurance, Pagnato said he targets an eight percent annual total return, with an annual cash flow of six percent.

Micro-Lending

Peer-to-peer lending markets like So-Fi and LendingTree have stepped in where banks stepped out and now offer Pagnato’s clients a differentiated source of return.

Micro-lending’s performance tends to follow the consumer cyclical sector, but with little correlation to equity or fixed-income markets overall. Pagnato targets an 8 percent to 9 percent total return, with 6 percent to 7 percent annual cash flow from micro-lending.

Farmland Leasing

“There are investments in farmland that we use. We find companies who lease the property from our clients, and then they receive two attributes of return,” said Pagnato. “They receive the proceeds from farmers leasing the property, and then they may enjoy additional appreciation if the property we buy increases in value. We look for 8 to 10 percent total returns with 4 to 5 percent annual cash flow. Again, these returns have little to do with the stock and bond markets.”

Agricultural Financing

In addition to leasing farmland, Pagnato’s clients may also participate as lenders to major agricultural concerns who need short-term cash flow to plant crops. The companies rarely default on the loans, which offer investors 8 percent to 10 percent total returns.

In-Demand Real Estate

Though most advisors wouldn’t consider them alternatives, Pagnato dips into certain sectors of the publicly traded REIT universe to offer his investors diversified sources of returns. One such place is REITs responsible for housing near university campuses. Enrollments often outpace schools’ ability to build dorms, so property in the vicinity of campuses in college towns can be a reliable cash generator.

Triple-Net Leases

“[These] are usually leases by major corporations like McDonalds or CVS Pharmacy,” says Pagnato. “The lessees pay all the expenses of the property. They’re typically backed by large Fortune 500 companies and they can throw off 7 to 8 percent cash flow.”

Original FA Magazine article²: “Six Alt Assets This $3.5B RIA Uses To Diversify Client Portfolios”

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At PagnatoKarp, we help high-net-worth families move forward. Our boutique team of professionals manage complex needs through investments, financial planning, tax, legal, private banking, family governance and concierge. With True Fiduciary® standards of transparency, we embrace the legal obligation to put your interests first while focusing on asset protection, cost, and opportunities.

Please contact PagnatoKarp at 703-468-2700 or ppagnato@pagnatokarp.com to schedule a private, confidential meeting at your convenience.

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 ¹Assets Under Advisement (AUA) over $3.5B as of 12/31/17. AUA = Assets under advisement refers to assets on which the firm provides advice or consultation but for which the firm either has discretionary authority or does not arrange or effectuate the transaction. ²This publication reflects the opinions and views expressed by PagnatoKarp which does not constitute investment advice and is subject to change at any time without notice. It is not an offer or a solicitation of an offer to buy or sell any securities or investments described herein. Information contained in this publication was sourced either directly or derived from reliable third party entities, the accuracy of which we are not responsible for and is not guaranteed. Investing involves certain risks that can result in a loss which investors should be prepared to bear, as the value of an investment can be worth more or less than its original cost when sold.