Saturday, August 18th, 2012
CONSUELO MACK: This week on WealthTrack, legendary Financial Thought Leader Charles Ellis and award winning financial advisor Mark Cortazzo show us how to cut sky high investment fees to save money and grow our nest eggs over time. Controlling your investment costs is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WealthTrack guest Charles Ellis, “investment management fees are much higher than you think.”
As Ellis points out the little over 1% of assets paid by most individuals and little less than one-half of 1% paid by institutional investors are “seen as so low that they are almost inconsequential” It turns out they are anything but! As Ellis points out “investors already own those assets so investment management fees should really be based on what investors are getting in the returns that managers produce.” Considered that way, fees are much higher. Pension giant CalPERS, the California Public Employees Retirement System, earned just one percent on its $233 billion dollar investment portfolio in the past fiscal year. If it were to pay the average half a percentage point charge on assets under management, the fee would equal 50% of their return for the entire year!
The financial toll investment fees take on portfolios over the years is stunning. Last year, financial advisor and WealthTrack guest Mark Cortazzo introduced a flat fee portfolio product for individuals with smaller and less complex portfolios than his usual high net worth clients. He compared the ten year costs for two clients, each with a $500,000 portfolio- one paying the not unusual annual fee of 1.5% of assets; to another, a flat fee client paying his $199 a month charge. With all other things being equal, the flat fee portfolio saved more than $80,000 in fees over the ten year period.
This week we are going to examine investment fees and how you can reduce them with Charles Ellis and Mark Cortazzo. Financial Thought Leader Charley Ellis is a world renowned investment consultant to governments, institutions and the financial industry. He has authored or co-authored some 18 books including the investment classic, Winning the Loser’s Game, and more recently, with Princeton economist Burton Malkiel, The Elements of Investing . He is devoting a great deal of his time to helping individuals become better investors. Mark Cortazzo is founder and senior partner of MACRO Consulting Group, a 20 year old financial advisory firm catering to high net worth, and now Main Street, clients. Mark has been recognized as a top advisor by Barron’s, Worth, and Fortune magazines among others. I began the interview by asking Charley Ellis how much higher investment management fees are than we think.
CHARLES ELLIS: It depends on what you’re thinking, but most people, honestly, most people think the fees are roughly one percent. That is low, compared to anything else. You buy and sell a house, one percent commission, you think, “My, God. That’s really low.” It just doesn’t happen that way. And if you look at it that way, fees are low.
CONSUELO MACK: Right. And it’s one percent, based on the assets under management, for instance. So you a $100,000 portfolio, it’s a $1,000 fee. Ah, nothing.
CHARLES ELLIS: Right. The problem with that way of thinking is that it doesn’t reflect any economic reality. For an example, if you’re an investor, you already have the assets, so you’re not getting the assets. You’re getting something else. What are you getting? You’re getting a return on the assets. Okay. So what’s the fee on return? If you take the kind of return people are expecting from now, out over the next 10 or 15 years, you’re paying about a 15% fee. That’s not low. That’s a pretty high fee. That’s twice as much or more than most people, say, would pay for a house sale or transaction. It starts to look like a pretty good profit margin, even for a pharmaceutical company. That’s a lot. But that’s not the right way to look at it, and that’s not the whole story. It’s actually a great deal higher than that.
CONSUELO MACK: So Mark, you run an advisory firm and you have seen what a lot of your competitors are doing as well, and, basically, the one percent of assets under management, as a fee, that’s the standard, right? Some are higher. So what’s your response to Charley’s critique that, in fact, fees are much higher than you think, when you just look at the returns you’re getting?
MARK CORTAZZO: I agree, and I think that the one percent is even wrong. We’ve had a lot of people come to us to review the fees on their portfolios to compare to what we’re doing, and they have a million-dollar account, and we ask them what’s their fee, and they said it’s one percent, because at a million dollars the fee goes to one percent. We looked at the fee schedule, and it was actually two percent for the first $250,000, 1.75 for the next 250, and one-and-a-half for the next $500,000. And when we did the math on a $1.1 million account, they thought they were paying one. They were paying 1.63%. So it’s 60% higher than what they thought was one, which in and of itself might have been a very high cost for a $1.1 million account.
CONSUELO MACK: And is that common practice, do you think, in the industry?
MARK CORTAZZO: The most common fee structure that we see at big brokerage firms and investment advisories is a blended- not back to dollar one- it’s a blended fee, you know, where we think that it’s not obvious to the client what they’re paying.
CHARLES ELLIS: One thing you should pay attention to is if you went to Canada, the fee normal would be something just over two percent, and if you go to all the major countries in Europe, it ranges between that two percent and one percent. And if you go to Japan, it can get even higher. So our fees are low relative to the world norm and behavior.
CONSUELO MACK: And that’s a change, Charley. You have been in the financial business for 50-some-odd years. You started as a very young child. And essentially, it was not always this case. So how did we get here? I mean, how did we get to where one percent is the norm, and even that’s not real?
CHARLES ELLIS: Well, for 50 years I’ve been working with investment management firms, and the basic metric has always been the same. You can increase your fees, and if you do increase your fees, nobody seems to mind, and you can increase your fees again, and nobody seems to mind. Because everybody says you would never comparison shop for price if you needed brain surgery. If your family was faced with a major lawsuit, you wouldn’t concentrate on the price of a lawyer. You’re looking for skill. And if you want to get great skill, you have to be prepared to pay up. And those who traditionally have had the lowest fees for active management have been not particularly skilled and not particularly well represented as to what their capabilities were. So we’re looking for value. We look for– best indication of value in most markets is price. So we are prepared to pay a price in order to get good value. After all, my family is dependent upon it. I’m dependent upon it. I want the best. And if you want the best, you pay up.
CONSUELO MACK: So where is the flaw in that argument now? Because you have said that, in fact, the market has changed now. And so buying the best- whatever the best is- the best has changed. So how has the market changed, in which case, that model doesn’t really work anymore?
CHARLES ELLIS: Well, the main change is there are so many truly wonderful, brilliant, hardworking, well-educated, slaving away at it people trying to beat the market that they’re just too darn many of them for any one of them to be able to do better than the crowd. And if you believe, as I do, in the value of prediction markets, there’s been no prediction market in the world with as many people putting real money into it, and really doing the research, and being free to make any choice they want to make, and working at it all the time. So they’ve got it pretty well right. Not perfect, but so much better than it ever has been before, that it’s very hard for anyone to do better than the crowd. And it’s even harder to figure out who’s it going to be before it happens.
CONSUELO MACK: So you have a different approach at MACRO Consulting, the way you treat different asset classes.
MARK CORTAZZO: As an extension of what Charley was saying, trying to define who’s going to be the best manager, you’re starting to see a lot more model portfolios that are using indexes as their base to invest the portfolios. So my 60-40 mix of index-based funds isn’t going to have a big fundamental difference in performance versus somebody else’s 60-40 mix. We’re buying the same indexes and the same asset classes. The average fee for a $500,000 account, national average, is one-and-a-half percent. We, as well as other discounted firms, are at about half a percent for that $500,000 account, and at a million, that one percent fee, there’s plenty of firms that will manage an index portfolio for a quarter of a percent, and that’s a big difference net in your pocket.
On the low return, one of the things that’s very frustrating for us is, we see people coming to us with fees that are 1.5, 1.75 percent, and they have half their money in fixed income, and the ten-year treasuries at 1.5, 1.45, their fee is more than their yield, so, you know, to Charley’s point, not 15%. It might be 100% of the earnings on half their portfolio is the fee. And so we’ve talked to clients about calling out part of the portfolio, put it in a money market. You know, money market, you can shop it around and get one percent net, FDIC insured, and then have the equity portion managed or, you know, an 805 equity portfolio managed, where you’re reducing your fees, and you’re reducing your risk.
CONSUELO MACK: So Charley, are some of the most influential institutional clients, probably at your behest, starting to question the fee structure? Is there any change occurring?
CHARLES ELLIS: Gently questioning would be about as far as most people take it.
CONSUELO MACK: And why is that?
CHARLES ELLIS: But there is a different way of answering your question, which takes us to the, well, what about active management versus passive management, which is a really important proposition. And if you look at the data, it’s very clear that institutional investors and individual investors, but particularly institutional investors, have been increasing. The number who invest in passive has gone up, and up, and up…
CONSUELO MACK: Yes.
CHARLES ELLIS: …every year. The percentage of their assets individually that goes into passive, goes up and up every year. So two of the major forces are increasing steadily and never reversing. Now, the reason for that is partly fee and partly the imperfectability of active management. So that if you really want to get a reliable result, and you would like to save money in doing it, going to what bothers most of us as individuals quite a great deal, I don’t want to settle for average in anything else, why should I settle for average in this? It turns out that is not average. That is comfortably above average.
This last year, for an example, 80% of actively managed funds underperformed the benchmark they were aiming for. You say, “Well, what happens over a long period of time?” It’s pretty grim again. Roughly, 70% of funds have been underperforming over every decade, and make it 20 years to make it longer. The data is not so good. It goes up towards 80% underperform. That’s a very powerful message, and people are getting it. And even though they’d like to have above-average children, and above-average automobile driving skills, and above-average dancing skills… we’d all like to have everything be above average. The fact of the matter is, if you can have an average flight on an airplane, you’d take it, because an average flight may be a yawner, but that’s just what you want in flying an airplane. And in the same way, if you really want to concentrate on what’s important in investing, you’ll concentrate on what you’re trying to retrieve, how much risk can you take, and what basic kinds of investing will do well, and then implement it through passive investing, either ETFs or index funds.
CONSUELO MACK: Mark, let me ask you about some other fees that we are not aware of. What are some of the most obvious that we should pay attention to?
MARK CORTAZZO: When we build Flat Fee Portfolios, we’re trying to eliminate as many of the conflicts of interest as possible. And you look at many of the asset management programs that are out there. They’re run by companies that are product manufacturers. So they also manage mutual funds. And so, you know, we’ve had examples where someone would come in, and they had 19 different mutual funds in their asset allocation model, and 16 of the 19 funds were a proprietary fund of the group that was doing the asset management. Now, there’s 26,000-plus mutual funds out there. They weren’t the best in 16 of the 19 categories. So they’re making additional soft dollar from the asset management fees. There are 12(b)(1) fees in additional costs that get passed on. And so the asset manager, if they’re receiving any other sources of revenue from that program, their objectivity to pick the best funds is compromised because of revenue. And so, the internal costs are very, very important to us, and when we do an analysis, we actually run that report for our client, and say, “Here’s all the funds. Here’s your expense ratio. And here’s what you’re paying internally in fees a year, in addition to the advisory fee.” And it’s usually a very surprising number to most people.
CONSUELO MACK: So what are the other kinds of red flags or even yellow flags that go up, if you’re an individual investor?
CHARLES ELLIS: Very large generality. The real problem for investment management was, 50 years ago, strictly a profession. It didn’t pay particularly well, but it was interesting work, and you could take some real pride in what you were doing, and you accepted it. It just didn’t happen to pay very well. Over the last 50 years, as fees have been increased, and the assets under management have gone up a great deal, and computerization has made it possible to manage substantially more money, the business pays very well. As a result, the focus on profession has gone down and the focus on business profitability has gone up. So you really ought to be watching is this firm in it for the business side or are they in it for the professional side.
And there are keys to the questions you can ask. What is the average length of employment of the people in your organization? How much do you invest in new people training and developing their skills and capabilities? How much of your time, Mr. Account Representative, do you spend every year in training programs? If you look at the senior people in your organization, how many of them are professional people, how many of them are business people? And by and large, organizations that are widely known and widely regarded for investment management tend to be pretty serious about the professional side.
CONSUELO MACK: How about naming some names? What companies would you say really have set a standard of professionalism that you would feel comfortable referring, an investment management firm or financial advisory firm, that you would feel comfortable referring friends to?
CHARLES ELLIS: I’ll start with Mark’s favorite and mine, Vanguard and DFA, two truly outstanding outfits. We can get into more detail in it, if you want to. T. Rowe Price, outstanding organization. Capital Group, which manages the American Funds- outstanding organization. I know, they’ve had in the last couple of years some imperfection in their results. Don’t worry about it. They are a great organization, and they will figure out what the problems are, and get right back on track, and you can always trust them in the long run. Dodge and Cox is also quite a good firm.
MARK CORTAZZO: I agree with virtually all the names that you listed. We use many of them, you know, in our asset management for our high net worth clients as well as our flat-fee program. But every one of those organizations has areas where they’re particularly strong. And working with an advisory group that’s independent, that’s not getting any money from any of them can help construct an all-star team, where you have each of those management teams do the position that they do best, and instead of having one fund family group managing every asset class within that portfolio, having them do their specialty I think can help…
CHARLES ELLIS: But Mark, that’s what you would say, because your business is to help sort it out and figure it out. You could also say any one of those firms, as a family of different funds, has consistent integrities, consistent discipline, consistent professional commitment, and they’re pretty darn good.
MARK CORTAZZO: Absolutely.
CHARLES ELLIS: So you could go either way.
CONSUELO MACK: Charley, you wanted to make another point. Because, you know, the active versus passive debate, and Mark, I’m going to find out in a minute where you come out on that, and we’ve had this discussion before, Charley, and I think it bears repeating, because you have had 50 years, basically, of analyzing professional managers, and to advise, you know, clients where they should put- big, big clients- where they should put their money, and it’s been a battle for you as well as to, you know, you finally said go passive. So what did you want to say about that topic?
CHARLES ELLIS: Finally, the epiphany. You’d think after 40 years you would get it. I didn’t. Forty-five years, somewhere in there I started to get it and realized. Part of it is by shifting from working with investment managers, to working with clients of investment managers, and watching what gets delivered, and you start paying a little bit more careful attention to it. Big stunning surprise for me was to find out mathematically that most managers underperform the benchmark they’re aiming for. Just happens to be the reality. Mathematically, nobody has been able to figure out who is going to do better in the future. Just can’t be done.
So okay, that’s pretty tough. What’s the third thing? The third thing is those who underperform, underperform by twice as much as those who outperform. So that doesn’t sound like a good deal. Then I’m looking at the numbers. Meeting, after meeting, after meeting, and it finally comes on like a light bulb. That string of numbers that are called fees is pretty big compared to that string of numbers called your extra return. In fact, the fees are huge compared to the incremental or extra return. I believe what the managers ought to be doing is adding investment advice and counseling, because there the value is tremendous, getting in the right direction, getting the basic structure right. That’s really valuable.
CONSUELO MACK: So Mark, active versus passive management, where do you come out in the debate?
MARK CORTAZZO: We also looked at the math. And if you think about this logically for a minute, all of the active managers put together are the market. So if you look at the collective performance of all active managers, their performance is the market. So the only differentiator is going to be their fees. So most index funds, the vast majority, almost 100% of them, underperform their benchmark, but it’s by a very little amount, where the active managers, that divergence can be greater. And for people who don’t want surprises, and, you know, good or bad surprises, I think that buying passive, it’s controlling some of the things you can control. Passive has much higher tax efficiency. You can control that. The fees you can control. You can control where you own, what you own.
So you’re taking a market that feels like it’s out of control, and at least empowering yourself with the ability to adjust the things that you have the ability to adjust. So we have an active model portfolio that we manage for clients that won’t take our advice to go to a passive strategy in our flat-fee model, but we frequently have follow-up conversations with them to see if they’ve learned the lesson. So we think that for model-based portfolios over long periods of time, control the things you can control, and costs, obviously, is one of the big variables.
CONSUELO MACK: So the One Investment for long-term diversified portfolio, and, of course, an investment can be an action that you take, whatever. So what would it be? What’s the one thing that we should do or the one thing we should invest in? Charley Ellis.
CHARLES ELLIS: Well, the best thing every single individual and probably every single institution can do is just sit down quietly and say, what do we really, really, really want to accomplish? What do we really, really want to avoid? And what is the most realistic way of getting where we want to go? That’s probably the best thing anybody can do.
CONSUELO MACK: So very much back to basics.
CHARLES ELLIS: Find out who you are, what are you trying to accomplish, and from there, it’s not all that difficult to get a pretty good answer, and to getting a brilliant answer to the wrong question would cause lots of harm.
CONSUELO MACK: In the context of our fee discussion, minimizing the fees, is there one action we should take to minimize our investment fees?
CHARLES ELLIS: Sure. Everybody, everybody who’s an individual investor should be actively seeking passive management. They can do it with ETFs. They can do it with index funds. And the best known, most widely capable index fund managers are the ones to go with.
CONSUELO MACK: Mark, same questions to you. One Investment, one action we should take for a long-term diversified portfolio.
MARK CORTAZZO: I’m going to go with controlling the things that you can control. And I’ll give you three quick examples. Things like money markets. The average money market is paying four-one-hundredths of a percent. You can shop that around and get FDIC-insured money markets paying over one percent right now. So that’s 25 times the yield. On your safe money, control the thing you can control. Making sure you’re looking at where you own, what you own. So tax-inefficient investments, make sure you own those in the tax-deferred accounts; tax-efficient investments, make sure you own them outside in your taxable accounts.
And the third and most important thing is making sure that you understand what you’re paying in fees, in dollars, as a percentage and relative to your portfolio size. And are you getting a good value for that? You know, it is something that people spend a few minutes to try to save a few percentage on their auto insurance. That’s hundreds of dollars. By taking the time to look at that and having it reviewed by someone, it could be tens-of-thousands of dollars, and maybe even a six-figure difference, even on a more moderate size portfolio over time, because it’s the effect of that compounding that’s being sliced off with those higher fees.
CONSUELO MACK: Mark Cortazzo, it’s so lovely to have you here from MACRO Consulting, and Charley Ellis, from numerous organizations, you know, author or co-author of 18 books, a new one on the way. Just great to have you on WealthTrack, always.
CHARLES ELLIS: It’s a pleasure to be with you.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is the essence of what Charley Ellis and Mark Cortazzo just discussed. It is: know what your investment fees are and take steps to minimize them.
Ask your financial advisor for an itemized list of the dollar amounts you are paying for all of their services, and the fees on each of your investments so you will know exactly what you are paying every year. If they won’t do it, start looking for another advisor. If you manage your own portfolio, analyze the costs yourself or pay another investment professional to do it for you. It can save you a ton of money in the long run. If you have a 401k, you are in luck. All 401k statements are now required to show the actual dollar amounts you are paying in fees.
Speaking of saving a great deal of money, during next week’s fund drive for public television we are re-running our must-see interview with social security guru Mary Beth Franklin on how to maximize your social security benefits. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as streaming video or a podcast no later than Sunday night. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.
Tags: Assets Under Management, California Public Employees, California Public Employees Retirement, California Public Employees Retirement System, Consuelo Mack, Dollar Investment, Employees Retirement System, Full Transcript, High Net Worth Clients, Institutional Investors, Investment Costs, Investment Fees, Investment Management Fees, Investment Portfolio, Nest Eggs, Portfolio Product, Public Employees Retirement, Public Employees Retirement System, Thought Leader, Wealthtrack
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Monday, July 30th, 2012
by Seth Masters, Chief Investment Strategist, AllianceBernstein
Individual and institutional investors alike have been shifting their capital from stocks to cash and bonds at a rapid rate in recent years, despite extraordinarily low interest rates. But if investors stop to weigh the importance of two different types of risk, they’ll see they still need stocks.
It’s tempting to give up on stocks after more than a decade of high volatility and low returns from stocks—and lower volatility with higher returns from bonds. But we think that 10 years from now, investors who do so will wish they had stayed in stocks—or added to them.
That’s not to say we think investors don’t need bonds. Despite extremely low current yields, we think bonds should still play their usual roles in the portfolios of most long-term investors: providing income, preserving capital and providing protection in times of stock-market distress (because bond prices tend to rise at such times). Bonds will be especially important if the market outcomes are at the extreme low end of our forecast range of potential outcomes.
But most investors are likely to need stocks to feel confident that they will have enough to live on, despite the high volatility of recent years. Remember that volatility isn’t the only type of risk. There’s also shortfall risk: not having enough money to meet your spending requirements. Investors must weigh both types of risk when making strategic asset-allocation decisions.
If you’re just thinking about market volatility, bond-oriented portfolios may look very appealing, especially today. We estimate there is less than a 2% chance that a portfolio with a 20% allocation to stocks and an 80% allocation to bonds will suffer a 20% peak-to-trough loss at some point over the next 10 years, compared with the 15% chance of such a loss for a portfolio with 60% in stocks (Display, left), as the left side of the display below shows. But if you’re just thinking about shortfall risk, a portfolio with 60% in stocks looks more attractive (Display, right).
We estimate that a 65-year-old retired couple planning to withdraw only 3% of their portfolio, grown with inflation, has a 12% chance of running out of money if they invest in the portfolio with 60% in stocks. That may not sound great, but it is materially better than the 24% odds of running out of money if they invest in a portfolio with 20% in stocks.
Today, uncertain macroeconomic conditions make large stock-market drops more likely than usual, and very low bond yields provide a thinner cushion. As a result, market risk can’t easily be avoided. And trying to avoid market risk is not a good strategy if it increases shortfall risk too much. A 20% loss is certainly painful, but it doesn’t hurt as much as running out of all of your money. Many investors who are currently focused on market volatility should be paying at least as much attention to shortfall risk.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer for Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.
The Bernstein Wealth Forecasting System,SM driven by the Capital Markets Engine, uses a Monte Carlo model that simulates 10,000 plausible paths of return for each asset class and inflation and produces a probability distribution of outcomes. The model does not draw randomly from a set of historical returns to produce estimates for the future. Instead, the forecasts (1) are based on the building blocks of asset returns, such as inflation, yields, yield spreads, stock earnings and price multiples; (2) incorporate the linkages that exist among the returns of various asset classes; (3) take into account current market conditions at the beginning of the analysis; and (4) factor in a reasonable degree of randomness and unpredictability.
Copyright © AllianceBernstein
Tags: Asset Allocation Decisions, Bond Prices, Bonds, Chief Investment Strategist, Current Yields, Enough Money, Institutional Investors, Low Interest Rates, Market Outcomes, Market Volatility, Portfolios, Rapid Rate, Seth, Shortfall, Stock Market, Stocks, Strategic Asset Allocation, Term Investors, Trough
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Tuesday, July 10th, 2012
From Mark Grant, author of Out of the Box
All You Had To Do Was Wait
“What makes people so impatient is what I can’t figure; all the guy had to do was wait.”
It was approximately twelve months ago that I called for a U.S. ten year at 1.25%. The yield back then was around 2.25%. We are a scant 26 bps from my prediction now and we have seen a 75 bps drop in yield during this time period. This has been fueled by the continuing “moments” generated in Europe and the demand for anything having some sort of safe haven status. We now have a second driver which is the recession in Europe and the substantial slowdown in the economy of China which I predict will place America in recession by either the fourth quarter of this year or the first quarter of the next.
The American stock market, always myopic in its view, is about to be hit by what it does pay attention to which is earnings. Europe represents 25% of the global economy and the recession there is about to have a very substantial impact on the revenues and profits of many American corporations. It was inevitable, as hindsight will expose, and now as our earnings season gets underway it will get documented in the numbers. If you don’t delight in losing money you will find that the yields of many senior and subordinated corporate bonds far outpace the returns of dividends and certainly the depreciation in value will be far less. Further, in times of economic stress, it is far safer as has been proved time and time again to be towards the top of the capital structure in bonds rather than in the bottom of the capital structure which is equities.
I can report a wide array and a great diversification of viewpoints on just what will take place in Europe but what also can be said with certainty is that most institutional investors all agree that there is a lot of risk on the table now. As part of this process I also wish to congratulate the media. Many commentators in the Press or on television are no longer willing to take the official press releases as fact. There are more people who are not only questioning the headlines but who are looking past them in trying to decipher not only their accuracy but there meaning. I suppose this has occurred by one announcement after another coming from the Continent that was so shaded and so misleading that eventually people woke up to the fact that inaccurate data was being provided and being provided in a systemic fashion. Then there is the timeline issue where plans are tossed out, do not materialize and are being held to account as mollifying statements that somehow never seem to achieve their goals. Whether it was the statements of the IMF and the EU that the new structural plan for Greece would produce a debt to GDP ratio of 120% or the giant firewall that would prevent Spain or Italy from ever needing to be bailed out or the bailout for Spain which their Prime Minister called “A Great Victory for Europe;” the cries of “wolf” are falling on less and less accepting ears.
“The secret of being a top-notch con man is being able to know what the mark wants, and how to make him think he’s getting it.”
It may work, for a moment, to rally equities after the next new piece of sliced white bread is announced but then the reaction flattens out and then the market declines as reality sneaks back in and finds its rightful place at the table. From the very beginning with the first European bank stress test which counted what Europe wanted to be counted and ignored what should have been counted to the second one which was falsified by its methodology; results begin to occur and calamities begin to happen, such as with Dexia, as the real data forced what the phony data reported tried to hide. Europe may cook the books and allow for risk-free assets or the Spanish central bank may allow for “smoothing” and carrying Real Estate at levels with no reflection of reality in them but when mortgages are not paid and commercial loans are delinquent; the lack of revenues and profits tell the accurate tale whatever was allowed to be ignored or not.
All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.
“The world news might not be therapeutic.”
-One Flew Over The Cuckoo’s Nest
Tags: American Corporations, American Stock Market, Bps, Capital Structure, Commentators, Corporate Bonds, Depreciation, Diversification, Earnings Season, Economic Stress, Economy Of China, Global Economy, Having Some Sort, Hindsight, Institutional Investors, Mark Grant, Recession, Safe Haven, Slowdown, Substantial Impact
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Thursday, May 17th, 2012
by Bill Smead, Smead Capital
In May of 2010 we wrote about how important it was for the companies which meet our eight criteria to have a strong vision and clear agenda for their business. When President George Herbert Walker Bush ran for re-election in 1992, he was criticized for not casting a vision for our country. In the aftermath, he called it “the vision thing”. We at Smead Capital Management (SCM) believe that every five to ten years those who manage money need to “cast a vision” of where they want to take investors and then backtrack from there to put a portfolio together to best take advantage of the vision cast. We believe there are three main roadblocks to the casting of a vision for the execution of a portfolio plan. In the absence of more attractive titles, we will call these roadblocks fog, bog and smog.
Vision is all about seeing clearly and fog inhibits the ability of folks to see anything other than what is right in front of them. The time frames used by today’s individual and institutional investors are creating fog. For example, Warren Buffett was uncomfortable with any six to twelve month projections about Berkshire Hathaway shares at the annual meeting last Saturday in Omaha. He was very confident about where they might be in five to ten years! Short-term predictions have a tendency to be foggy and long-term vision can be much clearer, in our opinion. To cast a vision for investing you need longer time frames.
Many in money management might have the vision for five to ten years, but they are stuck in a bog. They might have realized wisely in the early 2000′s that US common stocks were going to perform relatively poorly, so they moved to a position of wide asset allocation. The theory was that by spreading your nets widely you would always be catching some fish somewhere. This was a good idea early on, but now that it is being practiced by virtually every major financial organization and institution in the US, there is a great deal of net being used and very few asset classes catching fish. Worse yet, the five-year outlook for some of the normal fishing holes (think bonds, commodities, etc.) is downright dismal and disheartening. However, so much marketing, posturing and so many computer models have been put in place that the embarrassment of casting a new vision makes a money management professional feel like their legs are three-feet deep in mud.
The third roadblock is smog. Another description is pollution. Clients are scared from looking in the investment rearview mirror and they are allowing their attitudes to get polluted. They are attempting to limit the vision of their money manager by giving severe push back when vision enters the conversation. There is a cottage industry which exists today to pollute the minds of money managers and their clients. Go online, on TV or listen to the radio and you will hear a steady diet of negative smog and pollution. Most of it is concerned with the same one-year time frames that the vision caster must avoid. In many cases, these smog producers are part of one’s own research team or are a manager of a fund that you normally use to execute your long-term vision. We won’t name names, but in most cases these negative nabobs are becoming wealthy from other people’s misery. If that were the worst part things would be okay. Unfortunately, they have polluted the lungs and minds of financial professionals and their clients and shoved their legs deeper into the bog.
Our vision is that the best performing asset class of the next ten years will be large-cap US stocks. And we believe that domestically-oriented companies will significantly outperform those which depend more heavily on foreign revenue and profits. Lastly, we believe that most money managers are blocked from joining us because of fog, bog and smog. We’d like you to get elected and re-elected. Don’t forget “the vision thing”.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. All of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date stated in this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
Copyright © Smead Capital
Tags: Asset Allocation, Backtrack, Berkshire Hathaway, Capital Management, Common Stocks, George Herbert, George Herbert Walker, George Herbert Walker Bush, Herbert Walker Bush, Institutional Investors, Long Term Vision, Money Management, Portfolio Plan, President George Herbert Walker Bush, Roadblocks, Smead, Term Predictions, Time Frames, Vision Thing, Warren Buffett
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Wednesday, May 16th, 2012
Via Mark J. Grant, Author of Out of the Box,
The words were spoken by many; Juncker, the German Finance Minister, Merkel, Barroso, Monti and you can just keep going. They all said the same thing about the Greek PSI, “This is the best and final offer.” Each intonation was made with great moral suasion; each speech was directed toward the world’s institutional investors as we were reminded again and again that there was no “Plan B.” In the end most money managers swallowed the bitter pill, given such forceful pronouncements and took the deal offered on the $261 billion swap only to watch the value of the new bonds sink into horizon but no choice was given so there was nothing else, really, that could have been done.
“Trust … plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country’s institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.”
-The scientific journal, Nature
Of all of the events of yesterday, of all of the news, the most significant in my view was the announcement that Greece had paid off the $554 million bond maturity that was due yesterday and paid it off in full; 100 cents on the Dollar. With approximately $6 billion left in international bonds outstanding governed under some law besides Greek law two things are now obvious; there was a Plan B and it was just implemented and that Brussels and Berlin supported the Greek pay-off as there was not one peep of objection from any capital in Europe. What we were told, consequently, was not the truth and no financial paradigm can last for long when they lie to investors and breach the trust that had been placed in them.
“If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country’s income.”
-Steve Knack, Senior Economist at the World Bank
With the yield on the Italian ten year hovering around 6.00% now and the yield on the Spanish 10 year fluctuating around 6.50% the markets are clearly reacting to the breach of faith that has been demonstrated by Europe. This morning the Prime Minister of Spain said that “Spain faces the serious risk of being shut out of the markets.” This comment, by the way, may be the precursor to Spain turning to the EU/ECB/IMF for help and then between the total breakdown in governance in Greece and a plea for financial assistance from Spain is a spot, a line in the sand, where not only Angels but any rational man should well have great fear to tred.
If indications become reality then we are faced with a leftist government in Greece that will either renegotiate a new bailout agreement with Europe or it will head back to the Drachma or be forced there by the refusal of European Union to provide any additional funds. In Spain we are faced with bare bones arithmetic where the country cannot bailout its Regional debt and its back debt because they do not have the capital to do either; much less both. Both countries can flop about for a brief period of time but the conclusions are unavoidable I am afraid and so a very unpleasant landscape awaits us in the coming days. I have warned about all of this for quite some time and I have hammered upon it in recent days as equities, credit/risk assets, the Euro have all declined in value as I had predicted. There may well be a bounce or two along the way but I continue to maintain that dark days lie ahead based not only upon fundamentals but based upon a union in Europe that has been deceptive in presentation and deceitful in practice. Much of this could have been avoided, should have been avoided, but whether it was the European bank stress tests, the inaccurate debt to GDP ratios or the statements on the Greek bailout; Europe has systemically, methodologically and purposefully tried and tried hard to mislead not only investors but the public in the most shameful of manners. The liabilities that they have deemed “contingent” which have not been counted or used as a part of any balance sheet are now beginning to come home to roost and the falsification by omission can no longer be denied as real losses are taken. The lies of the State always give way to the truth of the numbers in the end and the end is nigh on a number of fronts. Long live the Emperor without any clothes but the poor fellow is naked no matter what is said.
In the last 10 days there has been a run on the Greek banks with the President of Greece announcing this morning that almost $1.27 billion has been pulled from their coffers in the last 10 days. The same kind of situation is beginning in Spain as people and institutions react to the unfolding truth. Bloomberg reports this morning that Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced “the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation”. Wolfgang Schauble, the German finance minister, stated his view quite clearly this morning, warning that unless Greece delivers a government that honors the terms of the bail-out, that “the country will have to leave the Euro.” Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider.” If Greece defaults on its debts it is a $1.3 trillion dollar number, forget the drivel that you read in the press because it will not just be the sovereign debt but the municipal debt, the derivatives, the bank debt, the corporate debt and all of the obligations of the country that will fall into the sinkhole of no return.
Actually the correct response to all of this will surprise you. You must go out and get the correct pair of sunglasses. That is the answer.
“Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses have been specially designed to help people develop a relaxed attitude to danger. At the first hint of trouble, they turn totally black and thus prevent you from seeing anything that might alarm you.”
-Douglas Adams, The Restaurant at the End of the Universe
Tags: Absence Of Trust, Bitter Pill, Bond Maturity, Economic Exchange, Friedrich Nietzsche, German Finance Minister, Greek Bank, Greek Law, Institutional Investors, International Bonds, Intonation, J Grant, Journal Nature, Juncker, Market Transactions, Money Managers, Moral Suasion, New Sunglasses, Political Legitimacy, Social Success
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Friday, May 11th, 2012
Individual investors are often ridiculed as being the last to get into the market and the last to get out. However, looking at trends in bullish sentiment suggests that individual investors may not be the dopes that many institutional investors often classify them as. In this week’s survey of bullish sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 35.4% down to 25.4%. This puts bullish sentiment at the lowest level since September.
Looking at the chart below shows that bullish sentiment on the part of individual investors has been declining since February or about six weeks before the S&P 500 reached its peak. If this was just a one-time event, we could probably chalk up the decline in bullish sentiment ahead of the market peak as a coincidence. The reality, however, is that last year we saw the exact same pattern as bullish sentiment also declined ahead of the big drop in equities. The fact that individual investors have shown such good timing twice in a row now suggests that they deserve more credit than many have been giving them credit for. Perhaps they could even lend a hand to the Chief Investment Office of JP Morgan (JPM).
Tags: Ahead, American Association Of Individual Investors, Amp, Bullish Sentiment, Chart Below Shows, Chief Investment, Coincidence, Decline, Dopes, Institutional Investors, Investment Group, Investment Office, Jp Morgan, Jpm, Laughing All The Way, Laughing All The Way To The Bank, Market Peak, Nbsp, Six Weeks, Time Event
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Thursday, April 12th, 2012
Introducing: Emerging Markets Total OpportunitiesSM
A lower volatility approach to emerging markets investing.
First introduced to U.S. institutional investors in 2007 and European investors in 2008, this unique portfolio is now available in Canada.
(Click image or here for video)
Portfolio managers Laurentius Harrer and Shaw Wagener discuss Emerging Markets
Capital International – Emerging Markets Total OpportunitiesSM – A lower volatility approach to emerging markets investing. Stocks, bonds and hybrid securites from 60+ countries. Low correlation to Canadian portfolios.
Experience in emerging markets – The Capital organization began managing the world’s first EM equity fund* in 1986. Today, Capital Group International, Inc. and Capital Research and Management Company manage emerging markets assets in excess of $20 billion and $55 billion, respectively.
Three portfolio managers — each with decades of experience in emerging markets investing:
Laurentius Harrer – 23 years of experience; native of Germany; based in Los Angeles
Luis Oliveira – 23 years of experience; native of Brazil; based in Geneva
Shaw Wagener – 30 years of experience; native of U.S.; based in Los Angeles
Low expenses – Anticipated MERs are well below industry averages for emerging markets portfolios, according to data from Investor Economics as of December 31, 2011.
Ideal for high net worth investors – Capital International’s new Emerging Markets Total OpportunitiesSM portfolio can be a good fit for your high net worth clients, with an anticipated MER of 1.25%** for minimum investments of $125,000.
Series A CIF 842
Series B CIF 862
Series D CIF 832
Series F CIF 822
Series H CIF 852 (minimum $125,000)
More videos, literature and webinar details: emergingmarkets.capitalinternational.ca
*Not available to individual investors in Canada. Capital International Asset Management (Canada), Inc. is part of The Capital Group Companies, Inc.
**Estimate only, since the portfolio was launched on March 30, 2012. See the Expenses and Compensation sheet on our website for details about other series, MER waivers and absorptions.
Tags: 23 Years, Canada Capital, Capital Group International, Capital Research And Management Company, Emerging Markets, Equity Fund, European Investors, Harrer, High Net Worth Clients, High Net Worth Investors, Individual Investors, Industry Averages, Institutional Investors, Inve, Investing Stocks, Investors Capital, Mers, Minimum Investments, Portfolio Managers, Stocks Bonds, Video Portfolio, Volatility, Webinar
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Wednesday, April 4th, 2012
by William Smead, Smead Capital Management
We (at Smead Capital Management (SCM)) have made the case that the poor performance of the US stock market from the end of 1999 to the end of 2008 has caused most institutional and individual investors to dramatically shorten the duration of their equity investments. In many cases, we are hearing that institutions and individuals want their advisors to help them insulate or “prevent” them from having another 2008. In a world of short duration common stock investing, sentiment polls have an increased importance. We like to say that an eye on the crowd is important if you have one foot out the door at all times. Professional investors have been forced by the power of the rebound in the stock market since March 9, 2009 to get invested, but they haven’t trusted the durability of this rebound along the way.
Individuals and financial advisors practice short duration through go-anywhere managers, exchange-traded funds and low-cost trading of individual common stocks. Institutional investors have done this by allocating a large part of their asset base to equity managers who attempt market timing and alternative investments in the hedge fund world. Studies show that the money in “alternative strategies” now dwarfs what is held in US long-only equity. See the chart below:
In a wonderful April 1, 2012 article in the New York Times, Julie Creswell presents the facts about pension fund performance in relation to how committed plans are to alternative investments:
“Searching for higher returns to bridge looming shortfalls, public workers’ pension fund across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.
But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.”
What Julie describes as “riskier” investments have also contributed to these very low levels of participation in long-only US stocks and especially long-only US large capitalization strategies.
When you breakdown the long-only participation, it is spread between US large cap, US mid cap and US small cap. Since small and mid-cap strategies have outperformed since the peak of the US stock bubble in 1999, it is safe to assume that institutions are the most committed to small-cap and mid-cap long-only strategies relative to the total equity long-only mix as at any time since the 1990’s. You can see this in Request for Proposal (RFP) mandate notices for small cap managers in periodicals like Emerging Manager Monthly. Institutional investors seem to like to close the barn door after the animals have run out. After ten years of outperformance by small-mid strategies, they are vigorously looking to increase their participation. Since small and mid-cap strategies are historically more volatile than large-cap strategies, this triggers an additional urge to time the market and has increased the importance of sentiment polls.
The Investor’s Intelligence (II) poll of investment newsletter writers is the oldest of the major sentiment polls and is the one I have followed during my nearly 32 years in the investment business. Our general view at SCM, as long-term investors by nature, is to not be interested in changing what we own based on 6-12 month stock market gyrations. For this reason, our view is that the sentiment polls are only useful at extremes. Therefore, everything that happens in between the extremes is just noise.
This week’s II poll showed that those writers who are bullish total 50.5% and those that are bearish equal 22.6% of the newsletter writers. Our observation is that it is very meaningful historically when the bullish sentiment reaches 60% or greater. In August of 1987, at the end of a run up in the Dow Jones Industrial Average from below 800 in August of1982 to over 2700, bullish sentiment broke 60%. By October 19th of the same year, the Dow fell to 1738. In February of 1999 and in February of 2001 at around 1240 on the S&P 500 index, bullish sentiment exceeded 60%. The S&P 500 index fell to 761 in October of 2002, a decline of 38.6%.
If history is any guide, it would take a large additional spurt to the upside in today’s US stock market to trigger a 60% bullish reading. We feel this could only come through a dramatic increase in long-only institutional large-cap US stock market participation and/or an end to the massive move into bonds made by US individual investors over the last four years. The bond market devotion would have to be replaced by a very meaningful move into US equities.
In 1987, institutions got heavily committed because of the comfort that derivative -related “portfolio insurance” provided many of them. The insurance was designed to protect against “normal” bear markets, not a drop in the Dow Jones average from 2700 to 1700 in 78 days! Both of these instances (August 1987 and February 1999), where the 60% bullish sentiment marker hit an extreme, saw price-to earnings (PE) ratios at historic highpoints. Warren Buffett, in his Allen and Co. talk at Sun Valley in the summer of 1999 mentioned that the Fortune 500 traded at 30 PE.
In our opinion, those who are very bearish about the US stock market need a substantial price increase to trigger historically extreme newsletter writer sentiment. Those who are optimistic should prefer a temporary correction or sideways movement to reinforce fear on the part of the crowd. This would cause the bullish and bearish readings to gravitate to toward each other and remove the risk of having some temporary “hell to pay” for those of us who seek to practice long-duration common stock investing.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.
Tags: Alternative Investments, Asset Base, Capital Management, Common Stock, Common Stocks, Creswell, Equity Investments, Equity Managers, Hedge Fund, Hedge Funds, Individual Investors, Institutional Investors, New York Times, Pension Fund Performance, Poor Performance, Professional Investors, Retirement Systems, Stocks And Bonds, Traditional Investments, Us Stock Market
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Thursday, February 16th, 2012
Guest post by Merryn Somerset Webb, Money Week
Twenty years ago, John-Paul Temperley was an intern in the SBC Warburg office in Tokyo. I was a junior broker, flogging Japanese equities to institutional investors across Asia. Until a few months ago, I hadn’t seen him since. However, he is now frightfully senior at Martin Currie; co-runs a fund that invests in Japan; and has an office 20 minutes walk from my house. I thought that I had better exploit the contact and pop over to see if he is as bullish on Japan as the rest of us. He is.
Japan, he says, is both “cheap and under-owned”. It’s cheap in the sense that 80%-90% of the listed firms trade at a price well below their book value (the market value of their assets). Theoretically, you could buy them, shut down their businesses, sell off their assets and walk away with a pile of cash. In some cases you might not even have to bother selling anything: much of the book value of Japanese companies is already made up of cash. He also notes that, contrary to the general view that there isn’t much going on in Japan, its economy is still creating enormous value. Japan “still registers more patents every year than any other developed economy, so there is still a lot of intellectual property” being created.
Add it all up and you’ve got a lot of cheap, well-capitalised, “emerging-market-facing companies with excellent intellectual property”. I ask about the trouble at Olympus – where the board of directors spent ten years and ¥135bn covering up investment losses in an astonishing example of bad corporate governance. Does this scandal tell us bad things about the dangers of investing in corporate Japan as a whole? Or is it a one-off? It probably isn’t a one-off, says John-Paul, but in general Japanese management is “okay”. And you can’t pull out of a country’s market just because of one nasty. “If you’d sold all your US stock holdings because of Enron, you’d have missed a nice bit of the market.” It’s a good point.
John-Paul also reckons that the political paralysis that’s been holding Japan back for so long is closer and closer to being resolved. “I tell clients that the most encouraging thing that has happened in Japan in the last three years has been the changes in government.” We’ve had six prime ministers in five years. That tells you that “democracy is alive in Japan”, that people are “dissatisfied with the status quo” and they want something done about it. This matters in Japan: for 50-odd years there has been no real change in politics, but now there is just about enough protest around to think that there might soon be some.
How to cope with the yen
Ok, I say. But if things are so great in Japan, why has the market performed so horribly (the Nikkei 225 is down 11% in yen terms this year)? The “bloody currency”, says John-Paul. The correlation between the performance of Japan’s stockmarket and that of its currency is absolute – when the yen goes up, the market goes down. And the yen has been going up for a long time. The silver lining to this is that anyone based in Britain who has followed our suggestion of investing in Japan has done fine – the rise in the currency has offset the fall in the market. The same goes for those who have invested on an unhedged basis with John-Paul.
When will it end? When the other big economies stop with the monetary easing; when Federal Reserve chief Ben Bernanke “announces on prime-time TV that QE3 [quantitative easing], QE10 or QE-whatever is being cancelled because the economy is improving”. That would push the yen down instantly (it’s currently being used as a safe-haven currency) and the market up, making it the ideal time to “buy as much as you can of hedged yen assets”.
However, as that time isn’t now, you are probably better off with the “less risky trade” of holding unhedged yen assets. That way, while you are taking downside risk on the currency, you aren’t taking as much risk overall. If the worst happens and the dollar utterly collapses against the yen, your stockmarket losses will be lessened by the strong currency. And if the best happens – the global economy gets sorted and the yen falls – what you will lose on the currency you will make up several times over on the market.
Will Europe turn Japanese?
That seems pretty clear and tallies nicely with our own views (always reassuring). So we move on. Does he think that Europe is on the verge of becoming the new Japan? In the sense that Europe is seeing “deflationary pressure caused by a de-risking bank system and a structural lack of demand for credit”, yes, he does. However, there are major differences between the situation in Europe now and that of Japan in the 1990s.
First, the sovereign debt. In Japan it was (and still is) mainly domestically funded. Thanks to the fact that it was one of the few places for the banks to “find a home for their deposits”, there was always strong underlying demand for government debt. The debt-to-GDP ratio may have been vast (and still is), but as long as people are prepared to refinance you, that doesn’t matter. In Japan, despite 15-odd years of scaremongering on the subject, financing still isn’t a problem.
The second difference, of course, is that Japan never had negative real interest rates. In the West right now, you can’t get an interest rate on a deposit that covers inflation and tax: returns on deposits are negative in real terms. But in Japan, flat prices and occasional actual deflation meant that even very low interest rates on deposits and yields on government bonds (JGBs) were positive in real terms. That made it, and still makes it, “absolutely logical” to invest in deposits and in bonds over equities.
That’s not the case in the West, where keeping money in cash means losing purchasing power everyday (unless you are saving up for a house, of course, in which case each pound buys more most days). All this means there is more domestic support for European markets than there ever was for Japanese markets.
I ask him what he would do if he were in charge in Europe. Like the rest of us he doesn’t have much idea: “the only thing you can do is restore confidence”. He and his colleagues reckon that Germany will in the end allow the European Central Bank (ECB) to monetise as much debt as is needed. First, Germany will want to be clear on the need for fiscal union as the trade off, but once that price is exacted there is bound to be monetisation via QE.
Buy Japanese real estate
So would he buy European stocks as a private investor on that basis? He might. Equity markets have already discounted recession and bad earnings numbers. “Valuations are generally low”, and so many people have been selling down holdings that, “even if there is an Armageddon-type event, the market has kind of discounted it”.
The bad news is in the public domain – people are talking about the European debt crisis at dinner parties in the same way they talked about dotcom stocks in the late 1990s. When “it feels uncomfortable” to buy, that often turns out to be the best time to buy. But it’s also worth pointing out that even during the first 15 years of Japan’s ongoing deleveraging, “you still had three or four decent economic cycles”. The cycles were short because they were reliant on inventory restocking, but they were still good bounces – and they came with good stockmarket bounces too.
Overall, he thinks equities look cheap, which is nice. But as everyone who has ever worked in Japan knows, “that doesn’t mean they can’t get cheaper”. It doesn’t mean we should all move all of our money out of cash and into stocks.
I ask for a stock tip – his favourite Japanese share at the moment. Fund managers hate being pinned down like this. But John-Paul is good enough to offer a suggestion. “We like real estate in Japan,” he says. Since the earthquake there has been a big increase in enquiries for new offices, yet there is “very limited supply” for the next four or five years.
As long as Japan’s economy continues to “tick over at a moderate pace”, the supply and demand balance should “improve dramatically”. How do we buy real estate in Japan? I ask. “Mitsubishi Estate,” he says – the ticker is JP: 8802. So there you have it – for the first time in many months of interviews, a stock tip.
Who is John-Paul Temperley?
John Paul Temperley of the Martin Currie Japan Alpha Fund. John-Paul Temperley is co-manager of the Martin Currie Japan Alpha Fund (along with Keith Donaldson and Claire Marwick) and the Japan Absolute Alpha fund, which uses a long/short strategy to play the Japanese market. The Japan Alpha fund has consistently outperformed its peer group since its launch in 2006, returning 0.1% over five years compared to an average loss of 11.5% for the sector, as measured by the Investment Management Association. Over three years, the fund is up 25.9% compared to a sector average of 13.6%. Temperley is also an analyst, covering the Japanese transportation and auto sectors.
Temperley joined Martin Currie in 1998. Before then, he worked on SBC Warburg’s Japanese equities desks in both Tokyo and London. He graduated from the University of Leeds with a degree in Chinese and Japanese studies. He is fluent in both Japanese and Mandarin Chinese.
Copyright © Money Week
Tags: Board Of Directors, Corporate Governance, Corporate Japan, Emerging Market, Institutional Investors, Investment Losses, Japan Economy, Japanese Companies, Japanese Equities, Japanese Management, John Paul, Martin Currie, Merryn Somerset Webb, Money Week, Patents, S Market, Sbc, Sbc Warburg, Scandal, Somerset, Stock Holdings, Temperley, Twenty Years
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Friday, January 20th, 2012
As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn from US equity mutual funds in w/e January 4th – the largest since the meltdown in early August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, ‘who is pumping up stock prices?‘ His answer is noteworthy as a large number of indicators suggest institutional investors are more optimistic than at any time since the ‘waterfall’ decline in the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global asset allocator sentiment surveys, and the huge variation between intraday ‘cash’ and overnight ‘futures market’ gains (the latter responsible for far more of the gains), the bespectacled Bay-Area believer strongly suggests the institutional bias is based on huge expectations that the Fed will announce another round of money printing (to stave off the panic possibilities in an election year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concluding remarks.
While we fully expect QE to come, we can’t help but question the willingness to meet market expectations so head on (remember when the Fed used to like to surprise) but with ever blunter (and seemingly weaker) tools, what more can they do – leaving a market (and note here we did not say economy as that is clearly not benefiting) that needs exponentially more ‘juice’ (EUR10tn LTRO?) just to keep from the post-medicinal crash.
Tags: Asset Allocator, Believer, Declines, Early August, Election Year, Futures Market, Institutional Bias, Institutional Investors, Market Expectations, Mattresses, Meltdown, Money Printing, Qe, Retail Investors, Short Interest, Short squeeze, Stock Prices, Trimtabs, Waterfall, Willingness
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