So they hiked
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Oh hi lol! The "just trolling" comment really aged well hey? but it’s amazing how much happens in a fortnight - the biggest ever levered buyout and biggest individual purchase of anything, ever now feels like old news. It may surprise you though that Mr Musk also has views on active investing.
Maybe Vanguard next?
Well well well. April was a bad month. Worst month since March 2020. Worst start to the year since at least the early 90's in both stocks and bonds. It’s all still in the mix: war, inflation, GDP, earnings, rate hikes. There’s also a new theme: currency - the dollar has surged to its highest level in 20 years.
Why? Interest rates of course, and on cue the Fed hiked by 50bps as expected yesterday. US and UK 10-year rates are knocking on the door of 10-year highs. The Fed comments -taken as removing the chance of the priced-in 75bps hike - sent stocks surging higher yesterday though. There’s no two ways about it we’re in the midst of the fastest hiking cycle for 40 years, expect a lot more recalibration on the way.?Update: the BoE also hiked Thursday, by 25bps, which was also largely expected.
Now do sterling …
The currency move is an interesting one as that has provided quite a cushion for the (unhedged) sterling investor during the latest leg of this selloff. While the MSCI World is down 10% in dollars, it’s only down 3% in sterling terms (if you weren’t hedging the currency).
Bonds are still in a deep hole
In the everything-bear-market I guess if you're running an uncorrelated strategy it pays to be doing well. Are they? In the main, yes. Flagship AQR Managed Futures and Style Premia funds are both up over 25% ytd per FETrustnet (although Style Premia still down over 5 years). the Proshares managed futures ETF is up 9% ytd. Insurance Linked Securities are showing pretty flattish in 2022 per Artemis
Earnings season update.?They’ve been pretty good with a few exceptions, we’re about halfway and , 80% have reported a positive earnings surprise + full year forecasts for the S&P 500 have actually improved in recent weeks [says Kristina Hooper?|?Jurrien Timmer?]
So I guess we’re tightening till something breaks?
But what should investors take away from all this? Expect to see lots of soft landing/hard landing mumble in the next round of investment outlooks, but I’m talking real questions. Actually on closer inspection there are more positive messages here than meets the eye: The first and biggest is higher expected returns going forward. This year expected returns for global stocks have probably risen by about 2% p.a. give or take, depending on how you cut it. Most of that is a rise in treasury yields/risk free rates. Prof Damodaran is pegging the future S&P returns at about 8% p.a. now, about average for the last decade (vs 5.75% at the turn of the year). All-in corporate bond yields are at or around 10 year highs around the level at the height of the covid peak in 2020.
Valuations look far more sensible. Price earnings ratios (if you like those sort of things) have moderated quite a lot without a huge selloff - at 17.6 (for S&P, based on next 12 month earnings)well within the bounds of long-run averages now per Ed Yardeni. And finally the markets may have done a lot of the Fed’s tightening work for it, in a situation while the US economy remains extremely strong.
Came for the party, stayed for the returns
Club 60-40 sounds like the package holiday from hell that your kids definitely do not want to go on, but it’s been quite a party these last few decades (hat tip John Authers for that one). While reports of its death have become so frequent as to become a tired cliche.
60/40 portfolios are down anywhere between about 5-11% so far this year depending on exact composition and currency perspective. But the longer term ride has been spectacular. 5 Year returns still top 7% p.a. for the global version, a pretty solid benchmark for all of your growthy strategies over that period of time - many a “smart” growth strategy has fallen short of that.
3 Things I’m reading.
1. The excellent Kai Wu has a question - is innovation an asset class - or better still, a factor (paper)? Can we completely re-write the equity investment script around this idea. This is quite the tour-de-force. Using US patent data and ML the team have put real data around common “waves of innovation” frameworks to identify the big trends and clusters of sub-innovation that trend through time, at the time.
领英推荐
They’ve mapped it back to public stocks, and created a 50-year backtest of a portfolio that constantly rotates into on-the-run innovation. They’ve tested for beta to traditional “growth” (it’s not) and neither is it all tech - innovation occurs across sectors. They’ve tested against all the other Fama-French factors. Innovation appears to have a robust 2.6% p.a. alpha.
You can even overlay a value filter and get DARP - Disruption at a Reasonable Price which increases returns and reduces risk (it avoids owning Zoom at pandemic-era prices, for example).
The conclusions prompt a complete re-think of how equity portfolios might be structured:
Stepping back, we believe investors should think about their portfolios in terms of the pillars driving value-creation today. Intellectual property is a key moat in the Information Age. But so are brand, human capital, and network effects. Portfolios should strive to have a nice balance of these intangible assets.
2. Inside Twitter's all hands by Casey Newton. Parag Agrawal is asked - could this have been avoided? Yes is the simple answer.
3. Warren and Charlie did their thing. Berkshire Hathaway meeting (summarised by CNBC). They bought the dip - deploying $51bn or roughly a third of Berkshire’s cash pile in the first quarter. Other than that it was the usual Buffet mumble: Quality companies with great leaders: ? . Buy American: ? (oh and did I mention how much we love our companies??). THERE IS TOO MUCH GAMBLING IN MARKETS: ?. JuST sAY nO To BiTCoIn: ?. Passive buy and hold ftw: ?. Facile responses to good questions on ESG: ?. Berkshire Hathaway is up 9% ytd
2 things I’m listening to
The concept has matured and now we have the idea of memevalue (can you honestly say that some of Tesla’s vast value isn’t to do with Elon Musk’s ability to constantly command attention). Fine, if you want a proper theory to hang this on you can think about the Merton option-value of equity theory. It’s all coupled with today’s attention economy and a little 2020’s nihilism: Let me buy this stock because nothing makes sense anymore. Finally, the memeskeptics were wrong on GameStop - check out the stock price today, it’s still 40x higher than 2019 . (web | apple)
2. Animal Spirits. My favourite podcasters Michael and Ben are the colleagues we all need at this point to thoughtfully talk through this …. well yeah I guess we’re calling it a bear market … to chat through markets and put where we are in context. (web | apple).
Bonus froth - 90’s nostalgia is real
It was great that so many of you enjoyed my nostalgic 90’s era music recommendations. Maybe that was just “my time” but it does seem like the 90’s was the last “real decade” with a clear singular cultural identity, before the internet came along and flattened everything. It doesn’t feel like we had enough in the 2010’s for that to be as strong a popcultural moment, although we will always have Justin Bieber.
Anyway on the music front some potentially worrying themes are afoot. the Atlantic asks if old music is killing new music with data showing that songs over 18 months take the lion’s share of consumption and growing.
Joachim Klement also points out that many new songs are effectively designed-by-committee (why they all sound the same) and that a small, bloated number of labels have become like utility companies: focused on owning solid cashflowing assets, charging rents and paying out dividends (think: music royalty funds as the most extreme example of this) rather than the creative envelope-pushers of yesteryear. Dare we say that cashflow-driven investing is ruining the music industry?!
The BBC's recent series What Really Happened in the 90's is worth a look.
One thing to brighten your day - Alex Sheridan imagine what happens when Linkedin met Tiktok -?
Till next time! enjoyed this? Please subscribe and share with colleagues!
Professional Trustee ★ First PMI Accredited Professional Trustee ★ scheme secretary ★ Business Ambassador for Sage House
2 年As someone who survived 18-30 holidays (hard to believe now, but true) the thought of club 60-40 sounds like the coach holidays a local travel company runs ?? Thanks again for the article Dan, A good read as ever for a non investment professional trustee
Chief Investment Officer at People’s Partnership
2 年Duncan Lamont you might be interested in the innovation as a factor piece
Pension Risk Solutions
2 年Couple of random thoughts: * based on an entirely unscientific sampling of my daughter’s pre-teen contemporaries, the 90s are definitely back in vogue: not just the music, but the concept of physical media. I’ve had a surprising number of requests to dig out my old CD collection; * I can see the argument for innovation driving returns, but isn’t there strong survivor bias in the analysis? It’s easy to see in hindsight which horse would win; the hard bit is identifying (consistently) in advance which will win out and which will fall. Even if you get the right theme, can you identify reliably when it will deliver value? Arguably the 90s tech boom and crash had the right theme, but investors piled in too early (and indiscriminately) before it had matured.
Investment Analyst @ Bradesco Asset Management | CEA
2 年Great mail out as usual Dan. 100% on the Animal Spirits podcast, it really has that feel of just two guys chatting about what they love - what podcasting really should be - as opposed to all the slick, over produced corporate puff that really doesn't say anything these days.
Senior Visiting Fellow, Bayes Business School, City St George’s, University of London | Independent Trustee | Investment Committee Chair
2 年Dan, innovation as a distinct market factor struck a chord with me. Often sparking episodes of frenzied market manias and culminating in an often inevitable bust, I've periodically pondered how best to sustainability capture waves of innovation. Interesting to see the internet data line going back to the late-19th century. The Victorians were inventive but perhaps not that forward thinking! ??