Big Freeze ?? ?? ???

So, Happy Thursday everyone! ARCTIC out there today so grab yourself a mince pie, a chunky knit, a hot coffee and let's dive in -

We've gone earlyyy with the Christmas tree this year and good news the boys have not managed to pull it over yet! Having kind of opted out of Christmas decorations for a few years due to trips away I must admit it's quite nice to be leaning into it pretty hard this year.

Already scoured the Spotify Christmas playlists, and they haven't started grating on my nerves yet... but give it a week or two. My top pick, freshly updated for 2023, is this one which is almost 7 hours of non-stop christmas delight. Magic FM has gone 100% Christmas.

This last fortnight markets have been pretty quiet since early November's big v-shape rally, stocks are up just a touch more, pretty much at the highs for the year now, within shouting distance of all-time highs. Non-US stocks are showing good numbers too.

Rates are also fairly steady since the higher-for-longer narrative peaked out in mid-October and we saw a big U-turn in bond markets. Folks are now talking about rate cuts again next year (the market is pricing about 5 by the Fed) with or without a recession. Government bonds funds are still likely in the red for the year but corporate bonds are up healthy amounts now, that's what starting yields of 6%+ will do for you.

UK pensions on the other hand, has been a busy place so let's double click on that just quickly.

The chancellor's Autumn statement contained a bumper package of pensions treats, including at least two big moves in DC: consolidation of smaller pots and the idea of "pot for life". Our team's views on these can be found here.

And in DB pensions there is definitely the whiff of change in the air as a tweak to tax rules on surpluses potentially prompts some changes in behaviour. It was fantastic to see an idea around protecting DB schemes to allow run-on first mooted by former LCP colleagues gaining enough traction to turn into an "actual thing" being consulted on (more here). LCP's handy summary of all the announcements is here.

Jo Cumbo writing in the FT had a good piece on what UK pension funds can learn from the Australian model (link to post) tl;dr- the need for large scale pension funds and collective investment funds management models being two big ones.

I almost got through writing this without poking fun at 2024 outlook season (honestly, I love it really). A couple of observations as you're reading them this year: One thing I always keep in mind is the ones that were more closer to being right last year were the ones that majored more on what the market was pricing than what was going to happen - it turns out that's the bit that matters (everyone thought a recession was likely, not everyone thought it was already priced and that led to different implied actions).

The other point is I'm pleased to see more and more managers majoring on long term return forecasts alongside "this is what the market will do next year". The discipline of the thought process of putting a line in the sand long term and wrestling with the potential implications of big themes like AI, the green transition or demographics is surely more valuable than coming up with year-end targets. You also tend to find that valuations don't end up being a big part of the story while they can be a disproportionate part of the discourse day to day.

Things I'm reading:

1. UK Asset Owner Stewardship Review 2023 Andreas Hoepner (link)

The big question: are Asset Owners misaligned with their asset managers on voting?

If true, that's a problem, given how much voting power rests with asset managers.

Between the lines: this study takes a data-driven approach to answering the question analysing asset manager voting track records against equivalent expressions of voting intention given by asset owners. So it's not about voting for or against resolutions but the concept of "voting like an asset owner" is defined statistically.

The bottom line - yes there is misalignment, which will probably surprise no-one BUT it's not uniform and there's real nuance here too:

A small but significant minority of asset managers ARE able to "vote like an owner" and show similar correlation of voting to the AO average as the AO's do to each other. Also, this group has got more aligned over the time periods analysed. This matches my own experience too.

The degree of misalignment varies amongst the rest, has often got worse, and misalignment is more pronounced when voting on resolutions at US firms.

This chart is a good way of looking at the spectrum. The bars are individual asset managers. Vertical axis shows actual correlation of votes with the AO average. Given AO's are only~60% correlated with each other in their intentions, anything more than this can be considered "aligned".

2. Karen Ward asks the big question: What is the outlook for corporate earnings? (link)

While earnings have been basically flat in 2023 as the market has boomed, pretty strong earnings are forecast around the world in 2024. These rest on potential revenue and margin improvements and it's not too hard to see risks to that picture. Will these have to come down?

I think this is the first time in a few months that Karen's key question of the month (well worth a follow btw) hasn't focused on interest rates, which is telling in itself.

3. Mike Sebastian shares thoughts on stock market concentration (link)

Should you worry about index concentration? tl;dr probably not if you are investing globally.

This is good advice I think - a lot of the concentration numbers that get thrown around (usually as a way to scare folks into active management) focus in on the US market and the S&P 500, but if you're an international investor then you can almost halve the commonly-cited percentages of the top stocks straight away when viewed globally which straight away makes it less worrying.

Yes, this year has been a bit of an outlier but remember that wealth creation has always been concentrated in a vanishingly small number of stocks so the pattern isn't that surprising.

This is a very neat chart from the economist on stock allocations by year of account-opening. self-explanatory, when you started always matters. Those folks who came of age around '08 have been permanently more cautious than those that came before and after.

Things I'm listening to

1. Jan Hatzius on Oddlots - Goldman's chief economist discusses their outlook: "The Hard Part is Over" and why economists got 2023 so wrong (web | apple)
2. Slicenomics - Nick Timiraos speaks to Kyla Scanlon. One of the top Fed watchers on watching the Fed, elections and new normals. (web | apple)

Grab bag

RIP Charlie Munger. A reminder of some of his best witticisms here, including balanced thoughts on EBITDA.

If you haven't yet checked out the Acquired episode with him, you should. It might have been the last interview he ever did.

Spotify wrapped is out!! Is that not one of the best brand marketing ideas of all time? My top 5 artists of 2023 are Van Morrisson, Carla Bruni, Taylor Swift, John Meyer and Lizzo so make of that what you will.

Jack Appleby has imagined a savage version of what Linkedin wrapped might look like - here

A Times article on the rise of Linkedin among twenty-somethings. So LinkedIn is giving serious vibes and Gen-Z are surprisingly here for it? I find articles like this kind of amusing. I absolutely agree with what it’s saying but also, like where have you been?! it’s really been going this way for at least 7 years. A lot of the classic criticisms apply to very dated versions of Linkedin. And at the same time a lot of other social networks are really not ageing that well in 2023 as the nature of contemporary online discourse really shifts (of course Facebook, but also twitter, even insta).

If you know French people, you know ...

Stay warm folks!