Posted inFSA Spy

The FSA Spy market buzz – 10 March 2023

Reality-based investing, democratic ETFs, getting AI to do the risk work, China’s new regulator, thoughts on International Women’s Day, a new asset manager and much more.

Andrew Ross Sorkin, playwright, screenwriter and film director, said, “Investors are sometimes too busy looking for profits to notice where the truth ends and the deception begins.” Spy has thought long and hard about these prescient words, from an unexpected source, as interest rates keep rising. Too many investors seem all too willing to believe that things have not really changed and that a 1% world is the same as a 5% world. Nothing could be further from the truth. Some very leveraged investors (or speculators) are about to find that out when the refinancing comes due, that there is seldom a pain-free change in rates.

Spy has heard a lot of nonsense spoken in various fund promotions over the years but he thinks he has found a first. According to Horizon Kinetics, their new fund has a “reality-based mandate”. As if all other investors prefer to invest in fairy land or delusions of performance, the ETF is focused on climate change and is investing throughout the entire climate change supply chain. According to Horizon, “The ETF invests primarily in the equity securities of domestic and foreign companies expected to benefit, either directly or indirectly, from the increasing focus on climate change and environmentally sensitive carbon-based energy production. A great many businesses will not. The Fund employs a dual, reality-based mandate…” There you have it folks – reality or nothing.

Of course, if reality-based investing is not your thing, you could always invest in the “democracies” fantasy instead. First Trust has launched a fund to invest in emerging market democracies. Bloomberg is behind the index that underlies the fund, thus the First Trust Bloomberg Emerging Market Democracies ETF. American investors, apparently, are more comfortable investing in democracies., even emerging ones. Whilst Spy is, at heart, a democratic enthusiast, he is only too willing to note that here in Asia different governance models have not exactly prevented vast economic growth and profits in the last few decades. Ironically, of course, the mature democracies of Europe seem to be experiencing some of the slowest growth of all…Still whatever warm blanket keeps you happy at night, Spy supposes.

Spy loves a good fintech start-up. Have you heard of Perhaps you should have. This new Singapore-based firm uses “artificial intelligence to predict the likelihood of corporate failure due to accounting manipulation and fraud.” The firm believes that it can help “pension plans, investment managers, sovereign wealth funds, insurers, auditors, banks, regulators and exchanges improve outcomes and avoid losses.” The firm has developed something called the “Manipulation Risk Analyser”, which provides a score from ‘least likely’ to ‘most likely’ for companies that exhibit “red flag” risk factors for possible financial manipulation, fraud or mismanagement. With all too many risk managers unwilling to look cold hard facts in the face, perhaps, might just be ticket. The firm has hired Michael Li , formerly of FE Fundinfo, to head up business development.

China has decided to make a vast set of sweeping changes to its financial regulatory regime. This carries on with the opening up of the country to foreign operators, which, naturally only makes local players more competitive. On Tuesday the new changes include: “the setting up a national financial regulator that oversees all parts of the financial sector apart from securities” according to Caixin, which was announced by the State Council at the annual meeting of the National People’s Congress, the country’s top legislature. This can, surely, only be a good thing. A single regulatory regime is easier for every company to understand and participate in.

It can surely not have passed you by that International Women’s Day took place this week. Spy spoke to the most charming and intelligent fund saleswoman who has spent a decade in Asia and time in London and Geneva. Her take was cynical but honest: “IWD has become the Valentine’s day of the corporate world. Everybody feels the need to acknowledge it with a box of chocolates and a press release but that is still tokenism. In finance, women get channelled to ESG and left off managing the real money.” Ouch! but Spy could not help but see the utter truth behind the comments and all the more tragic when study after study suggests that women actually have better risk-adjusted returns when in charge. Ditch the choccies and flowers and give women the wheel, reckons Spy.

Spy is rather intrigued by a new asset management firm that has been set up by a former CIO of Mellon Investment Management, Dave Daglio. It is named BC-GUMPS. The firm takes its name from the “acronym used by pilots to make sure they follow repeatable and tested processes every time they land a plane, de-risking an otherwise uncertain situation.” The intriguing thing is that the firm is planning to invest in credit derivatives. The last time credit derivatives were in vogue, markets were in for a rocky time. 2008 springs to Spy’s febrile mind. If Dave thinks this is where money is to be made, hold on to your hats.

Spy’s quote of the week comes from legendary investor, Benjamin Graham, “An intelligent person might not be an intelligent investor. The right temperament makes a bigger difference than IQ points.” Never a truer word spoken in Spy’s humble opinion.

Until next week…

Part of the Mark Allen Group.