Is Quincy Jones the new face of the stock market?

Once upon a time, people with excess cash to invest would give it to experts who resided in castles with aristocratic names like Bridgewater, Eaton Vance and Lord Abbett. These experts would take the money and invest it in the stock market. They would study the market the way a lover studies the topography of his beloved, surveying peaks and valleys, looking for opportunities to find pleasure in public places where no one is looking.

Experts refer to this pleasure, not by the capital letter O, but the Greek letter alpha. Alpha is the excess returns on an investment relative to a benchmark, such as the S&P 500 or the Sam Adams index that always returns 5.0%. For many years, the experts prospered, consistently beating the benchmark, producing alphas and increasing their fees in proportion to their golden reputations.

Some experts would charge as much as 2 and 20--2 percent of assets, plus 20 percent of profits--and for many years investors would happily pay, believing that smart, affluent, charismatic humans who lived in castles could consistently beat the market. It was the triumph of hope over experience, humanity over brute nature. But the experts didn't always beat the market, and somewhere along the way, people began to lose hope. More and more, the experts were referred to by their colloquial, slightly disgusting name, “stock picker.”

Source: The Financial Times

In a chorus of “If you can't beat the benchmark, join it” investors began to abandon the castles and their stock pickers. These days, money is moving from actively managed funds to passive investments known as Exchange Traded Funds (ETFs), financial instruments based on holding stocks in proportion to an index--a collection of assets with a theme, such as the DOW, government bonds in emerging markets, or even whisky stocks or obesity stocks--with fees that are significantly lower than actively managed funds. According to Morningstar Investment Research, the average traditional index fund charges 0.74% of total asset value.

The first ETF was launched in Toronto in 1990, when the Toronto Stock Exchange created a fund designed to track the TSE 35 Index. A few years later the SPDR S&P 500 ETF was launched, tracking the benchmark U.S. stock market. Today it's the largest ETF in the world, trading $14 billion per day, dwarfing the $3 billion daily trades in Apple, the most actively traded stock in the world.

There are now more than 1,800 U.S.-listed ETFs with nearly $3 trillion in assets under management. ETFs now account for nearly one half of all trading in U.S. stocks and are helping to fuel the stock market rally, especially among the so-called FANG stocks.

Facebook. Amazon. Netflix. Google.

The stock pickers are picking their hair out. The rise of passive investing robots that thoughtlessly mimic an index is distorting the market and messing with the stock picker's ability to pick undervalued stock. FANG keeps rising and with it the benchmark that the poor stock pickers are measured against. ETFs are making it difficult for stock pickers to find pleasure in places no one is looking. In order for stock pickers to thrive, someone has to eventually discover what the pickers saw before anyone else. But ETFs are looking elsewhere. The ETFs are eating alpha. Over the past year, $263 billion left actively managed mutual funds and $308 billion flowed into passive funds, mostly Vanguard and BlackRock.

“It is just mindless buying of these technology names.”~ The lament of a stock picker

My grandmother Nana, the woman who who taught me everything I know about stock picking at the racetrack, always said, “If you chase a bull market, sooner or later you're gonna get gored.” Passive funds are chasing the market and are enjoying the returns that go with the chase, yet being passive is so boring!

What we need is some pizzazz, some marketing to bring these ETFs to life until the entire market goes passive, everything screeches to a halt and we all get gored. What we need is ...

The Quincy Jones ETF, the latest exhibit in the museum of late capitalism.

Quincy Jones' ETF (ticker QJ) invests in companies related to streaming music, media and entertainment. If you read the prospectus (I don't recommend it) you'll find that Quincy Jones licenses his name. He does not participate in developing, composing (that's a shame), calculating or making any other determination with regard to the index. Quincy Jones is a record producer and musician. He's not a stock picker. You can't blame Quincy Jones if the Quincy Jones ETF strikes a sour note. Quincy Jones is not a sponsor or promoter of the fund. Quincy Jones disclaims any duty, obligation, or liability to any investor, or any person connected to the fund. Quincy Jones simply slapped his name on an ETF to give it a face and make it look cool.

We can only hope that the Quincy Jones fund is the first in a series of celebrity-branded ETFs such as:

The Beyoncé ETF (Ticker BEE). The theme of the Beyoncé Fund is investing in companies that disruptively turn lemons into lemonade. Most heavily weighted stock: Waste Management Inc.

The Kim Kardashian ETF (Ticker KIM) The Kim Kardashian Fund invests in companies that do nothing of value, but are good at attracting attention. Most heavily weighted investment: Theranos. The Kardashian Fund is in perpetual need of cash injections.

The Martin Shkreli ETF (Ticker FU) The Martin Shkreli Fund invests in companies that put profits before people. Most heavily weighted stocks: Mylan, Wells Fargo and Valeant

Just remember: these funds may have a human face, but they are inhuman.

This week in Jamie Dimon

Sadly there is no such thing as the Jamie Dimon ETF (Ticker SNGD), but the JPMorgan CEO did meet with Irish Taoiseach Leo Varadkar this week.

A brief digression: Taoiseach is an Irish word with ancient origins that translates to chieftain or leader. It is often mispronounced, so a quick lesson is in order in case you ever have to introduce a Taoiseach.

The Taoiseach and the CEO discussed the bank's expansion into Dublin where JPMorgan has purchased a castle with room for 1,000 people, double its current Irish headcount. Jamie Dimon was chatty about the meeting, praising the Irish for their openness and innovation.

“Dublin is a beautiful city, with great real estate and an open business climate.” ~ Jamie Dimon praises Dublin as a city that beats the benchmark

The Taoiseach was tight lipped, only admitting through a spokesperson that the meeting did indeed take place. Perhaps Leo Varadkar doesn't want to discuss what openness really means.

Later that day, Jamie Dimon went out on the lash with a few senior staff and favourite clients to an Irish pub where he looked for some craic even though he must have been totally knackered.

And finally, Amazon came oh so close this week to raising a glass of its own wine. It was reported that the online retailer was fermenting its own wines called NEXT that could dovetail into a foray into beer called PREVIOUS and a line of tequila called THE END. But it was just a typo in a press release. For now.

May your weekend beat the benchmark!

-Lynne

Recommended reading and viewing that exceeds the benchmark

How to beat the benchmark of productivity. [New York Magazine]

Food that sparkles rarely gets eaten. [The Eater]

The convenience store that will come to your door.