Distribute Capital Innovations Real Asset Separately Managed Accounts

Elysian Capital Markets Group To Distribute Capital Innovations Real Asset Separately Managed Accounts

My Interview with Michael D. Underhill, Chief Investment Officer, Capital Innovations, LLC

By John Harline

Coto de Caza, Calif. August 31, 2015 – Elysian Capital Markets Group, LLC today announced an agreement to distribute a suite of Real Asset Separately Managed Accounts, which are advised by Capital Innovations, LLC of Pewaukee, Wisconsin.

As volatility in the capital markets continues to establish its presence globally, the use of Real Assets such as Listed Timber, Listed Agriculture, MLP’s, REITs and other types of Listed Real Assets are being more broadly accepted as a complement to common stocks and bonds.  In addition to diversifying a portfolio, Real Assets can potentially reduce risks in market volatility, given their low or non-correlation to equities and fixed income.

Such is the concentrated passion of Michael D. Underhill, CIO and Founder of Capital Innovations, LLC, who after spending 16 years on Wall Street working for investment houses like Lehman Brothers, Janus Funds, Invesco and Alliance Bernstein, decided to refocus his drive towards Real Assets.  “I realized that after 16 years on Wall Street, the firm’s interests and client interests were not aligned. “I wanted to do something that would capitalize on my skills and investment industry track record of success in a unique and innovative way. I wanted to focus on delivering Real Assets in a handful of unique Real Asset strategies.  It was my dream to provide solutions for clients through separate accounts, fund structures and any other types of structures that were appropriate for the client… and not for the investment company to generate revenue.”

In July 2007, Underhill’s dream became a reality when he founded Capital Innovations, LLC, one of the industry’s first investment management firms dedicated to investing in the Real Asset investing space.   Firmly planted in the rust belt of Milwaukee, Capital Innovation’s foundation stems from Underhill’s unique geographical design.  “We started the business here to have a grounding, to have a geographical center in the United States but also, to remove a lot of the noise that’s on Wall Street,” says Underhill.  “When you manage money in huge financial centers, you typically listen to a lot of the financial center noise and there’s a lot of it out there.  We are happy to be off the beaten path and a thousand miles from Wall Street, and we like it that way.  We do things our own way, with our own internal research, to make investment decisions.  It not only helps us manage portfolios and select securities, but we can take that research, put our thoughts into white papers and provide thought leadership through Capital Innovations Institute for our clients and numerous professional organizations. (CFA Institute, CAIA, EDHEC, etc)

Underhill, a leading authority on Real Assets, has authored books, white papers and articles on the subject, in addition to providing insightful commentary on the subject for CNBC, Fox News, Bloomberg and numerous speaking engagements worldwide.  “Capital Innovations is squarely focused on Real Assets and has a deeper value approach to investing,” states Underhill.  “We have a tremendous amount of experience at the top of our organization.  Susan Dambekain, my co-portfolio manager, has 24 years of experience and our head of research, Bill O’Connor, has 35 years of experience.  We are admittedly top heavy with investment balance and after only eight years, we are finally starting to see that the market is rotating around and accepting marketable, publicly traded Real Assets and we are seeing it today because of the mandates, and some of the search activity that is going on by the institutional consulting firms; but also by the broker-dealer community, the registered investment advisor community and the financial planning community.  You are starting to see it in some of the main stream fund companies, they are acknowledging that investing in things like Listed Timber and Listed Agriculture, MLP’s and REITs and other types of Listed Real Assets are a great complement to common stocks and bonds.”

Currently, Capital Innovations provides asset management services with clients across corporations, foundations, endowments, public pension funds, Taft-Hartley labor union funds, as well as sub-advising a series of funds for Sprott Asset Management in Canada.

The suite of Real Asset strategies broadly covered by Capital Innovations include: Agriculture, Infrastructure, Master Limited Partnerships, Multi-Asset, Real Estate Investment Trusts, Timber and Utilities.  The asset class is being utilized by investment managers, financial advisors, consultants and registered investment advisors trying to build out their allocation models that resemble Yale, Harvard and some of the other astute endowments.

A reliance on research summarizes the core of what is done on a daily basis within the investment team at Capital Innovations.  Their research focuses specifically on the 1,500 publically traded real asset securities. “Within the 1,500 securities, it is a very inefficient universe,” says Underhill. “We work on concentrated portfolios of 25 to 50 securities.  So, our focus is on the thematic.  Within Agribusiness, it is a thematic trend.   Projections show that by the year 2050, the world’s population will be 9.5 billion, which is an increase in size by 40%.  In fact, in the next ten years alone, there will be an estimated one billion more people on the earth.  The big question is, how will you feed them?    We need to increase our protein output by 70% to raise more chicken, pork, beef and what’s referred to as animal protein in industry nomenclature.  Animal protein requires an inordinate amount of water.  Only 1% of the world’s water is fresh, portable drinking water.  Of that 1%, 72% is used for commercial agriculture.  As such, there is not enough water to raise more animal protein.  So, we need to invest in things like organic milk, almond milk, soy milk and different types of other proteins.”

The Real Asset story is one of supply and demand scarcity.  In the case of Timber, the mountain pine beetle has destroyed one of every three trees in British Columbia, Oregon, Washington, Idaho, Northern California, Colorado.  “The only way you can kill the female beetle is by having weather that is 40 below zero Fahrenheit for three consecutive weeks.  Not many places like that in the U.S. and North America have that kind of temperature bandwidth for such a protracted period of time,” says Underhill.   “So this mountain pine beetle has been an infestation that has wiped out 30% of our timber.  So when you look at decreasing supplies from an economist’s standpoint, and then you put on the other side of the equation demand for single and multi-family housing, where single family housing and permits and new construction starts with permits has been the best we’ve had since 2007, then a decrease in timber supply and an increase in timber demand, well, that’s the definition of commodity price inflation…  No one has a Timber mutual fund in North America except for Sprott Asset Management and Capital Innovations is the team that manages it.”

As for China and its place in the Real Asset equation, Underhill believes that years of commodity stockpiling and consumption have resulted in an economic handover. “The Chinese economy is slowing down, it used to run at an 8-9% annualized GDP, so a very healthy economy,” says Underhill. “You have 1.3 billion people in China consuming all of these commodities, and it’s not like they will stop consuming commodities, it’s just the Chinese stopped stockpiling all of these commodities, and that’s causing a revision downward in GDP.  So, you have a lot of people calling for the end of the great Chinese cycle, and the commodity super cycle… it’s not the end, it’s just a revision.”

As China continues to utilize currency valuations to interject cash into the market to stem volatility and stabilize the economy, the world will continue to feel the dramatic effects.  Not much different than the effect of the Federal Reserve’s action with respect to interest rates in the U.S.   Additionally, in the last month or so, China has stepped in and injected billions of dollars in cash into the equity markets just to stabilize it.  “You are going to see more volatility in the marketplace compliments of China’s devaluation of the currency,” says Underhill.  “This causes volatility in the currency and commodities markets and a down draft in oil and some of the base metals, (iron, ore, copper), because China is not theoretically consuming as much, which it will, soon.  Eventually, it will bounce back.  It does, however, portend a more constructive environment for precious metals, gold and silver, because of that devaluation of the Yuan.  So, I don’t see it being anywhere near the end of the world.”

Capital Innovations provides strategies based on an investment process that has had nearly a decade of application in the market.  Elysian Capital Markets Group intends to direct its distribution focus, as a priority, upon registered investment advisors, dual-licensed financial advisors and consultants that represent high net worth investors looking to further diversify their portfolios by increasing yields and lowering correlations to equity and fixed income markets.  The Separately Managed Account structure will allow these investors the flexibility to customize their exposures to each of the asset classes, with the option of blending multiple classes in a more efficient manner.   To learn more about Capital Innovations, LLC and its investment strategies, visit: www.capinnovations.com.

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