Donald Calcagni, Mercer Advisors' chief investment officer and investment committee chair, steers strategy for the $60 billion firm's offerings.
Calcagni, who has held various positions with Mercer over the past decade, appears in interviews with major financial media outlets, including Bloomberg and The Wall Street Journal, and his expertise includes portfolio management, fiduciary oversight, corporate finance and taxation. His responsibilities also include advising Mercer's private market funds.
Under Calcagni, Mercer Advisors became the first independently owned RIA in the United States to sign the United Nations-supported Principles for Responsible Investment initiative, according to his LinkedIn profile.
Calcagni spoke with ThinkAdvisor this week to answer several questions about his market insights. Responses have been edited for length.
THINKADVISOR: What is your current take on the markets, a segment or sector that you think is really interesting now, and why? What does this mean in terms of specific holdings?
DONALD CALCAGNI: I think equity markets are overstretched. I think valuations are high. That's a broad comment. When you look at the S&P, it's currently trading at 21 1/2 times (forward earnings estimates). By any historical measure that's pretty high, and so that's a concern. It's not a huge bearish concern, but it's definitely a concern.
My bigger concern within the S&P 500 is really those Magnificent Seven stocks. They've done amazingly well. That's great. They've had amazing earnings growth, but their projected earnings growth beginning in Q4 of this year is projected to really come in line with the future expected earnings growth of the broader market. Which means at that point they candidly no longer become special.
And that's going to begin to impact their valuations. … Tesla's getting beat up a little bit, they disappointed on earnings, and so we'll see if that pattern persists across other technology companies. But at the moment that's probably my biggest bearish concern when I look inside public equity markets.
As we're witnessing this rotation out of megacap technology and into small cap — we saw that start to really take off here over the past two weeks — and there's a lot of reasons why that's the case. So I think small cap in public equities is very interesting given where we're at with respect to interest rates and the Federal Reserve.
Are there any specific areas within small cap that you favor at the moment or are staying away from?
I think those companies that have floating-rate debt, which is about 30% of the Russell 2000. I wouldn't get too excited about any sectors. I think that's the wrong way to look at it. I would look at those companies that are either unprofitable or marginally profitable that could become profitable, or even more profitable, in the event that the Federal Reserve cuts interest rates.
Because as the Fed brings rates down, those companies with floating rate debt are going to be well positioned to profit from that. All of that cash flow that was otherwise going towards their interest expense will now fall to the bottom line. So that's a great place to be.
What is your biggest bullish feeling now and why?
Within public markets it would be small cap. But I think investors can do better in private markets because that's the private market equivalent of the small caps generally.
Private equity with the right managers, and that's a huge caveat, with the right managers, over the next seven to 10 years — remember, private investments are very long-term investments — as interest rates come down are probably poised to do even better than the Russell 2000.
But that's only for investors who are willing to commit capital for a seven- to 10-year period. Private equity — what I'll call middle-market and lower-middle-market companies — that's how we refer to companies in private markets.
And would investors do that by investing directly in a company or in some kind of a fund?
Always a fund. They should never do an individual company. So they should invest in, and again, we're talking vehicles that are open only to qualified purchasers, so this would be investors with $5 million or more in investable assets and they have to make sure that they're selecting the right managers.
This is a market unlike public markets, where candidly, most managers don't add any value in public markets because they're so brutally competitive. Private markets is the complete opposite. There is a significant opportunity for very good fund managers to add significant value. The best way to do that would be to work with a good advisory firm or if you have access on your own and you know which managers are good.
