Recently published analysis by the senior European economist at Schroders confirms what I have suspected for a while: UK shares are relatively very cheap.
Asset Allocation
When ‘insurance’ maybe doesn’t pay out.
I read today on the Bloomberg new service that the yield on US Treasuries (which is a quick way of summarising the price of US Government bonds) has fallen to a level that implies the US Federal reserve will CUT interest rates 3 times next year. That is not altogether what one might predict!
It seems that worries about trade wars and other factors are prompting big players to buy Treasuries, either to profit from such rate cuts, or because they think there will be a US recession, or both. Apparently there is a strong view that such a recession is on the way. If there is and bank rates fall then the ‘hedge’ might work and provide some compensation when equity prices collapse.
But the idea of a US recession is hardly good news. Much as we don’t rejoice in making an insurance claim when some disaster happens, we are unlikely to be happy to make a bit on our exposure to the US bond market if we are seeing our equity portfolios trashed.
What if US interest rates don’t fall? With very high employment levels and Trump’s tariffs likely to push up inflation, then there is some probability that they won’t. They may even go up more. In that case, the yield on Treasuries will need to rise and values will fall. That may also be bad news for equity markets and furthermore at some stage a recession will happen. So there could be a double whammy.
In that case investors will have to ponder the storm damage and realise that the insurance is not going to help.
I take the view that as political risk remains (unusually) the most significant and that means normal economic considerations are out the window, it is best not to bet on the direction of interest rates but to assume a revaluation downwards in equity markets as troubles build up. In that case, I prefer to hold cash.
Multi asset funds are fashionable but are they any use?
A former client of mine from my time working as an investment adviser recently asked me what I thought about multi asset funds. By multi asset she meant funds that hold a range of asset types (often as low cost ETFs which can be traded almost instantly at low cost) and mix them up according to a stated objective which is usually specified in terms of risk and expected return.
They had been presented to her as a better option than a selection of specific individual asset allocated funds in market sectors, on the basis that the manager of a multi asset fund can change the asset mix much faster than an IFA can because the IFA has to go through all the hoops of making recommendations and getting client approval. Even an investor who runs their own asset mix and looks at their portfolio every day can’t trade as fast as a city institution, and probably has less information. The advice this investor had received even suggested that IFA’s are not really capable of advising clients what to do when there are sudden changes in markets. That comment came from the client’s own IFA!
It is undeniable that a multi asset fund manager could quickly take money out of a market really quickly and move to cash or another type of asset if the fund prospectus and objectives allow that: investors need to know exactly what multi asset means for the fund they have in mind as it is not a narrow term and is open to interpretation. But even assuming a fund is recommended with absolute flexibility and manager discretion, some questions arise about the alleged advantages.
The suggestion that trading in and out of the market on the basis of short term news flow or analyst predictions would make you more money is largely discredited. Even if it does work, how do you know that the manager of your multi asset fund is any good at it? The evidence of returns from multi asset funds that seek to lower risk (absolute return funds) is that the managers in the main are in fact not at all good at it – I have written about that previously.
Furthermore, a single multi asset fund will have an objective that is decided by the people who want to market it – not your needs as an investor. A portfolio you build yourself or which is set up by a competent investment adviser will be designed to meet your risk requirements, cash flow needs and interest in the subject and typically won’t need to be quickly re-organised because of ups and downs in the stock market cycle – the existence of the cycle will be assumed and built into the portfolio design.
It is often true that the fees for multi asset funds are higher than for sector specific funds. OK, you may say, because they are managing the assets actively. If that is true, why are you paying an adviser if they have “out sourced’ this task because they don’t have the relevant expertise? You are paying twice. Would you go to the hairdresser and pay once to be told what style you need and then pay again in full for the actual haircut? Maybe some people would but at least they would appreciate what they are doing.
There is arguably a role, in my opinion, for ‘funds of funds’ which are slightly different. Here a manager picks funds or shares/ETFs with a specific focus where perhaps you or an IFA can’t access the whole market because it is too specialist or esoteric . I have invested in ethical multi manager funds myself, accepting the slightly higher fees. To date, as I maybe should have expected, the multi holding selections of the specialist have not really done any better than my own narrower researched funds mix.
Defensification (m)
US Mid term elections (m)
Do they matter for investors?
The short answer is not a great deal. Politics at a national level (as opposed to at a geo-political or international level) is usually only a risk factor for specific industry or stock sectors.
Facebook (and others) – risks now apparent, but should you exit tech?
Depending on which news media you read, you are pretty much bound to have heard about record falls in the price of Facebook shares, apparently due to a slowdown in the rate of advertising revenue.
Of course, Facebook and for that matter Google, are in trouble with politicians for behaving “without moral leadership” to quote. This factor seems not to have much impact on the share prices. If you have any detailed knowledge of the history of the oil industry (the book to read is “The Prize” by Daniel Yergin), it will all look pretty familiar. I am surprised President Trump has not started tweeting about anti-trust legislation, something that was prompted by the utterly disreputable behaviour of Standard Oil (the largest remnant of which is now Exxon Mobil). Later this legislation was used to attack IBM, which in my college days was seen to be so large as to be able to outdo many nation states. I realise many young folk won’t even have heard of IBM!
As I mentioned in a another recent post about share price swings, these are most dramatic where the share price is justified on the basis of expected future profits growth, with the psychological overlay of the “fear of missing out” (FOMO). So if profits growth is at risk and investors are sitting on large paper profits, they will dump shares in an instant. There is a very old cliché in the investment world that a profits warning is always the first of many. That default idea also exacerbates sell offs.
So, should investors now pull out of tech funds? I personally will not. Some fund mangers will see a fall in prices as a buying opportunity because the cultural change (like the adoption of oil as a fuel for motor vehicles as opposed to use in smelly heaters and lights) is genuine, set in and will not be reversed. There will be winners and losers, new legislation and even systemic shocks to all the share values in the market, but I have no doubt that IT and media linked together are driving forces in business and profit generation for many years to come.