Posted inFSA Spy

The FSA Spy market buzz – 11 Dec 15

Horrible MPF funds; Blackrock a raging bull on ETFs; Eaton Vance innovating; Smart beta is fashionable; Beaujolais Nouveau meets high yield and much more.

“The mood has become very gloomy again”, said a Gucci-handbagged fund salesperson to her Louis Vuitton-carrying friend in the Hong Kong IFC bar, Liberty. Spy was there, of course, drinking a modest house brand vodka and tonic. “The RMB is tumbling, the Fed is taking rates up and investors in commodities are getting ready to mix beer, wine and whisky before breakfast. There is not exactly anywhere to hide,” said the LV girl. Good point, thought Spy, who ordered a second v&t.

Looking over MPF funds this week, Spy notes that performance has continued to be largely horrible. Most sectors except US and Japan Equity and some ultra conservative bond funds are underwater vs last year. Two of the most widely used funds, because of the way MPFs are sold, have been abysmal: HSBC MPF-SuperTrust Plus-Asia Pacific Equity down -13.45% in one year to mid-November and AIA MPF Basic Value Choice-Asian Equity down -12.65%. On the bright side, hat tip to Manulife Global Select MPF-Japan Equity with the best performing MPF fund at 12.87% vs last year.

How bullish is BlackRock on ETFs? Very, says Spy. “ETFs are just a better mousetrap than a mutual fund,” BlackRock’s president Robert Kapito said, speaking at an investment conference. “Every day, people are coming up with new uses for them.” Blackrock is expecting total ETF assets to double in the next 3-4 years. Spy thinks the old active vs passive battle is set to escalate. Who will be the big loser? Traditional funds with expensive distribution models, Spy believes. 

Spy notes in a report from Seeking Alpha that Eaton Vance is going to launch an innovative new ETMF – i.e. an ETF mutual fund that hides the majority of its constituents and reveals only its top 10 holdings. Perhaps we should be buying into stock exchange companies, as they are destined to benefit from this flurry of ETFs, Smart ETFs, ETMFs and other refurbished passive products to be listed around the world?

If further proof were needed that smart beta has been the fund concept of the year, look no further than Smart beta was the most searched for term on Investopedia this year. Others in the top 10 include: “fintech”, “unicorn“ and, most bizarre of all, “negative interest rate policy”. The full list is here

Spy came across a commentary on high yield bonds this week that was so spot on it is worth repeating in full:

The greatest wine marketing ploy was branding new wine “Beaujolais Nouveau” and creating a frenzied race to get the young wine from the vineyards to Paris, writes Shaun McDade, head of portfolio management at MitonOptimal. That exploded into a global event, “Beaujolais Day”, which popularized — and brought immense profits into – the wine business.  

“At the stockbroking firm where I worked at the time, we plied our clients with gallons of cheap plonk that made their teeth go blue, their tongues black and their heads hurt and the next day they called to thank us profusely and give us business. What a pleasure! In terms of its effectiveness as a marketing exercise, the phenomenon that is (was) Beaujolais Nouveau, must surely have no equal.”  

He draws an analogy with today’s $1.2trn in junk bonds, which account for half of all corporate bond issuance since 1990. Many investors hold them in their portfolios through funds or ETFs. Yet, “somewhere along the way, junk bonds have been re-branded as ‘high yield’. Like the unsuspecting buyers of Beaujolais Nouveau back in the day, one can’t help wondering if these would be quite so popular an investment if they were still called `junk’.     

He says it’s proof of the old saying: “You can’t polish a turd, but you can roll it in glitter”. For more wry words of wisdom, visit here.

Until next week…

Part of the Mark Allen Group.