Portfolios
Midweek Musings – little trouble in big China?
Warning shot?
Or to be more precise – diddy (DiDi) trouble.
If you have not read about the Chinese ride sharing conpany DiDi (like Uber), you may not know that its IPO on the US stock market raised over 4 billion US dollars, but the share price did not fly away from launch. In fact the opposite happened.
Watching Brief – June 2021
Pottering About
Decline and fall?
It is increasingly obvious that we are living at the end of a cycle when it comes to global political systems. But not necrssarily ending in the way we might have expected a few years back.
A long term status quo was first disrupted by the tearing down of the Iron Curtain, fall of the Berlin Wall and apparently successful popular uprisings in Arab and middle European Countries. Even the election of a black president in the USA seemed to offer hope that modern democracy was maturing in a way that would serve citizens rather than exploit them under dictatorships or plutocracies.
Midweek Musings – Dedicated Follower of Fashion?
Midweek Musings – What Use Are Alternatives Funds?
Introduction
Portfolio theory from the late 20th century suggested that one could mitigate the volatility risk of owning equities by buying fixed income stocks (bonds). Some investors would add real estate, usually commercial property, as well. That basic model had long been modified in the institutional investment market by the use of hedging techniques and the investment firms that market products to retail investors have for some 30 years now been offering ‘tamer’ versions of hedge fund investing in the form of absolute return (AR) funds. That phrase is rather UK centric and in the USA a more common classification is ‘alternatives’. Morningstar has pigeon holed funds into a range of alternative categories.
Some changes in Morningstar categories for Alternatives
That firm recently reviewed the classification against a background of general consensus that many funds thus described were not really doing what they promised. I recently listened to a presentation that explained what they had discovered in Europe and the UK and what they were going to do about it.
Here are the main points as I noted them:
- AR or alternative funds are complex and many have disappointed
- New categories would better describe the way such funds are supposed to work
- In the past there has been a very high attrition rate as funds have failed and closed (or rarely, used one technique so successfully that it could not be repeated!). More funds closed than opened in 2019 and 2020 and only one in 5 funds in all their current alternative categories is more than 10 years old.
- Some funds (for example many listed as long/short) are not actually being run any differently to mainstream equity funds, so should be recategorised in the relevant equity category. This I had observed years ago with the Newton Real Return fund, which was presented as an absolute return fund but was really just a tactical international equity fund.
- There has been inconsistency at Morningstar in the categorisation of such funds across global markets. I think that UK investors would have maybe been using the Investment Association category (Targeted Absolute Return) anyway, so would not have been overly concerned about Morningstar’s global policy. That IA category also includes a mixed bag and should be treated with caution, by the way.
- They are taking action that puts funds of a similar style together and with simpler definitions, where possible.
- Their overall definition of what makes a fund ‘alternative’ now takes on board the concept of expanding portfolio diversity or eliminating dominant risk factors in traditional markets, having low correlation but some flexibility. One might guess that is what the average retail investor understands hedging to mean, so great!
- A new category addition will allow for some managers using currency as a specific risk mangement technique
Inplications for us
I think this is good news. I have explained to investors how difficult it is to identify the different styles in funds that are marketed as useful for diversification and risk control.
I have had to tell people that some products in the markets are using techniques like selecting non correlated global macro themes that are not recognised as Absolute Return objectives and so those funds are hard to research. The JP Morgan Global Macro Opportunities fund which I have owned for many years is one such.
The new categories will bring together funds like that (Macro Strategy) and assist our research. Moving funds that were pretending to be clever at handling risk back into groups with general managed equity funds will get rid of some funds that were not doing what they said on the tin!
Midweek Musings – Spring Sunshine?
As I write this (April 6th), I see stock markets well up on the day across the globe and Sterling is down. Both these factors (if they prevail until markets close) will give our porfolios a little Springtime valuation lift. Of course, that is one day’s events and as such pretty useless information for someone pondering the future direction of markets. But maybe short term data is of some use? That is my theme this week.
YTD (year to date)
3 months data (YTD for 2021) is arguably more useful, not in terms of predicting future valuations, but because we know the global macro economic context and we can see how invesors in different places and types of assets have reacted to the sort of changes I highlighted in my Watching Brief last week.
If I had to pick only 3 relevant contextual factors, they would be these:
- economic recovery driven by vaccination programmes (or low Covid 19 incidence as in China),
- US government spending plans and the impact of those on inflation and interest rates,
- finally, those who prefer real profits to speculative momentum gains raising their voices more audibly and maybe being listened to.
Here is some data (year to date, various sources and rounded slightly).
Note that data extracted over a short period is very sensitive to the start and end dates (in this case January 1st and April 5th), so the absolute numbers are of only curiosity value: it is the relative differences that are interesting!
Major Markets (in local currency terms)
| S&P 500 | +10.2% |
| FTSE 100 | +4% |
| FTSE 250 | +7% |
| NASDAQ | +8% |
| EuroStoxx 50 | +11.8% |
| TOPIX (Japan) | +8.8% |
| MSCI World Growth (USD) | -0.6% |
| MSCI World Value (USD | +4% |
| Sterling Index (relative to a basket of currencies) | +2.2% |
This suggests that we should all have made money so far this year but that some of our returns as UK investors in overseas assets will have been dented by the revaluation up of Sterling which makes investments in other currencies worth less.
Funds
I checked out a few funds that I own, know well or which are representative to see if the above index data was reflected in performance, due to asset class selection (or asset mix for multi asset funds) or manager stock selection. This data is for the cheapest retail share class and in Sterling terms, so allows for the currency headwind where applicable.
| MAN GLG UK Undervalued Assets | +7.4% |
| Artemis UK Smaller Companies | +13.5% |
| Baillie Gifford Global Discovery | -4.3% |
| Fundsmith Equity | +1.2% |
| Blue Whale Growth | -1.8% |
| Vanguard Lifestrategy 60 | +1.5% |
| Vanguard Lifestrategy 100 | +5.1% |
| Royal London Sustainable Managed | -2.5% |
| Wisdom Tree Gold ETF | -10% |
What do you make of that?
I draw these conclusions:
- The UK has been a good place to invest this year (and indeed at the end of last year), holding its own for the first time since the Brexit vote. There is no currency headwind as there is for most other assets listed, so the UK, especially away from big foreign currency earners in the FTSE100 is more or less top of the pile. Of course, this is not a comprehensive list, but one I arbitrarily decided was interesting, abusing my editorial authority!
- There are hints that investors have fallen out of love with some of the leading growth stocks as owned by Baillie Gifford and to a lesser extent by Fundsmith and Blue Whale.
- The fixed interest element in the Royal London Multi Asset Sustainable fund has seriously dented performance. Indeed, as I have been saying for a while, fixed income investments are more risky at the moment than their long term volatility averages would suggest. This can also be seen in the difference between the returns from the Vanguard Lifestratgy 60% equity and 100% equity funds.
Do I conclude that I should be piling loads more money into UK smaller company funds and dumping my global growth assets? Of course not in such a simplistic way – only a very naive investor chases recent past performance. In any case, this data tells us nothing about systemic risk and that is still at a high level.
When markets sell off in a crisis, virtually all stock market assets fall and those that went up the most recently will usually fall the most!
So, I am as careful now about the amount of equity risk I am carrying as I have been for the last 2 years or so. The data above does validate my decision to use cash as opposed to general fixed income assets as my insurance policy. My decision to also use gold to a degree is open to challenge on the basis of recent losses, but I am sticking with that as a long term defensive asset with inflation proofing thrown in.
Of course, one has to be invested in equities to make money long term and it is possible to diversify in lots of ways within any equity asset allocation. Working out where markets are going is therefore worth the effort and looking at data like that above is part of the process. Markets are traded and priced on the back of human behaviour in my strong opinion, so it can be instructive to see what our fellow investors are up to!
Past performance is not a guide to the future as the regulators expect us to be told but recent past performance does tell us what investors recently chose to buy in the market conditions that we know about and which may well still prevail.
The fact that a fast car was travelling at 150 mph on the autobahn 4 hours ago does not really help the driver if he is in a traffic jam in the city or broken down with an overheated engine! But the driver might have avoided either problem if he paid attention to current data: the traffic info on his Satnav or Google and his car’s temperature gauge or the electronic equivalent.
In a sense recent past performance is informative even if not predictive. Use such data carefully, applying it to what you already know about the context and you will become a better investor.