Envestnet PMC Co-CIO on crypto investing: Entry point is a ‘big piece of the puzzle’

Dana D’Auria, Co-CIO at Envestnet PMC, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss outlook on cryptocurrency and the equities market.

Video transcript

KRISTIN MYERS: We want to continue this conversation and bring in Dana D'Auria, co-CIO at Envestnet PMC. So, Dana, yesterday was Doge Day, as we just heard Jared mentioning. Right now, Doge down about 11.5%. Everyone is talking to me about adding cryptocurrencies to their portfolios-- if they should, if they shouldn't. Where are you standing on crypto right now?

I know Doge started out as, essentially, a joke, as a meme. But if folks should be adding cryptocurrencies to their portfolios, what should they really be looking at?

DANA D'AURIA: So it's a fantastic question. I can tell you this is a focus here at Envestnet in terms of just exactly your question-- what is the entry point? Should there be an entry point within portfolios? Crypto's interesting in that clients are able to get there pretty quickly on their own.

They don't need their advisor. Coinbase-- there's multiple ways that-- PayPal even, right-- that you can get access to crypto markets. And advisors are trying to figure out, is this an asset class? Do we need to get in? Are the clients missing out? Clients are obviously asking, to a certain extent, about it.

And I think in the US it's interesting, because we don't have an ETF mechanism for this, right? The ways that you would normally access something are not available, like an ETF or a mutual fund. You're looking at private placements, you're looking at direct holdings. Other things that you would normally do with an asset class like diversify is more difficult with crypto, right? You do have Ether, you do have Doge.

But outside of Bitcoin-- and Bitcoin is, of course, extremely volatile-- and outside of Bitcoin, there's a lot of questions around whether you should be trying to access. And then on the other side, you have clients who are doing it without you-- doing it without the advisor.

And you have good reasons to consider the long-term prospect of a threat to fiat currency and a better place to be than, say, traditional gold, diversification benefits putting it into a traditional portfolio. So there's a lot to consider. And I think entry point is a really big piece of the puzzle.

KRISTIN MYERS: All right, Dana, I want to look out over the rest of the year in terms of broader market action. What are you expecting for US equities? Are you at all anticipating, perhaps, a correction? We've had some folks talk to us about a bit of volatility that they are anticipating going forward, this previous sell-off that we had seen over the last couple of days notwithstanding.

DANA D'AURIA: Yeah,. I think the interesting thing-- so without trying to make a prediction, which I think is, obviously, always tough to do. I think what's going to be interesting as the year progresses is to look at how the tax package is going to filter in. So we have earnings now, obviously. We have stock prices not necessarily even reflecting the positive earnings that we're seeing, which is interesting, right?

The market's already sort of looked past the expectation of fantastic earnings. A lot's already been priced in, I guess, from that perspective, is the conclusion that we've seen this massive rally, the expectation is that earnings will outperform. The expectation is that stimulus will create a surge, and reopenings will create a surge, and we're sort of seeing that, right?

So evidence that we see, data that we get from Yodlee, Envestnet's unit that looks at de-identified spending data, is able to kind of confirm that the states that are open are seeing more spending, and we're seeing it on consumer discretionary as you'd expect. We're seeing travel up, et cetera.

So all of those things kind of-- if they're priced in and we don't have, say, taxes-- we don't know where the tax bill ends up. There's a lot-- there's a long way to go on that. So as that starts getting priced in, potentially, you do have somewhat of a pullback. Because, obviously, the infrastructure spending on the other side is a little bit more lagged. But I don't-- I don't know that I think that that's a long-term call is just markets working out the information that's coming to them.

ALEXIS CHRISTOFOROUS: Dana, we're coming off a pretty long period of US stock dominance. What about if you're looking outside the US right now, especially at emerging markets? And I ask because of what we're seeing happening with the virus in other parts of the world, particularly in India and Japan, where the numbers are spiking now and throwing into question the strength of the global economic recovery. What, if any, exposure do you have to markets outside the US?

DANA D'AURIA: So I am definitely a proponent of diversification. Points are valid that we can and will see spikes. And these are idiosyncratic events, right? You don't know which country is going to have those problems.

But that, in my mind, is more reason to be diversified across economies, not less. So when I look at the broader picture of a client portfolio and how best to mitigate risk, I think there are a lot of good reasons to be diversified internationally, one of which is just if you're in the US stocks, you're in about 50% of the productive capacity of the globe, right?

So you're leaving a lot on the table. US and ex-US stocks tend to trade dominance over time. So if you're investing, if it's a long-haul portfolio for you, you maybe want to consider being diversified, with the expectation that the US could be a place where underperformance is more-- there's greater underperformance than ex-US, which, again, they've traded.

You know, and valuation multiples favor having ex-US, particularly emerging markets at this point. Growth estimates to a certain extent favor ex-US in the portfolio. So these are all good current arguments. But I would say the long-haul argument, if you're investing in equities, is to diversify as much as you can, precisely because you don't know where and when a specific risk comes into play.

ALEXIS CHRISTOFOROUS: And would love to get your thoughts on small cap stocks that have really been holding their own, I think, against the broader market-- and especially since everybody seems to be agreeing that we're going to be an environment of rising inflation. Do you like small caps any better in that environment?

DANA D'AURIA: Yeah, same argument about diversification I think applies there too. I think a recent survey, NFIB survey, asked small business owners whether they would be able to pass on price increases. And the answer was largely, yes. And historically, that seems to have been the case.

So I think equities in general are a good inflation hedge over the long-term. If inflation is your concern in the short run, you should look at inflation-protected securities. You should look at techs. But if you have a long-term portfolio, equities are a great place to be, and small caps in particular can be a nice place to be.

But not the whole thing-- they should be in the portfolio, they should be diversified into small caps. I think, interestingly, small caps also, which may not be as widely known, a lot of the factor signals that work and are in a lot of portfolios, whether explicitly or implicitly, work a little bit better on small caps than they do in the large cap space. So I'm definitely a proponent as well of diversification into that area.

KRISTIN MYERS: All right, Dana D'Auria, co-CIO at Envestnet PMC, thanks so much for joining us today.