Posted inFSA Spy

The FSA Spy market buzz – 17 February 2023

Efund’s drink bet, Federated Hermes’ straight-talking wisdom, getting active in Japan, hedge fund launches in 2022, Fidelity is hiring, scary words from central bankers, Jack Bogle and much more.
FSA Spy

The AI hype machine is in full swing, judging by Spy’s in-box. Like the overexcited NFT revolution a few years back, ChaptGPT is causing a flurry of press releases that promise the earth and fortunes round the corner. Spy is, of course, impressed with ChatGPT but, for the record, still thinks the entire concept is mis-labelled. Spy prefers the term Educated Intelligence not Artificial, because for all of ChatGPT’s programmed power it still fails to make genuine quantum leaps into radical conclusions, which is what human intelligence does so well. Therefore, for now, he will be ignoring the hype a little longer and consign those excited press releases to a bottom drawer for future review.

As many of Spy’s long-suffering readers will know, Spy has an enthusiasm for a tipple or two. Unsurprisingly, an ETF launch this week in Hong Kong by Efund caught his eye as it is entirely focused on the Chinese alcohol industry. The new thematic, CSI Liquor Index ETF, trades on the Hong Kong Exchange and quite simply allows investors to benefit from companies that make or distribute booze in the mainland. The fund currently includes firms such as Wuliangye Yibin, Luzhou Lao Jiao, Kweichow Moutai, Shanxi Xinghuacun Fen Fen Wine Factory and Jiangsu Yanghe Brewery. Like the cost of a bottle of Kweichow Moutai itself, the fund is not cheap; it has an annual fee of 0.80%

Federated Hermes has published its “Letters to Investors” for February and Spy reckons the piece should be required reading for wealth managers and investors. The article is authored by Jonathan Pines who focuses on Asia ex-Japan. In it, he demonstrates with absolute clarity, why the performance of a fund and the performance of an investor within a fund, may not be the same. “Just because we might beat a benchmark, it doesn’t mean that our investors necessarily will.” The direct honesty of that line by Jonathan made Spy want to read more. For experienced people the maths is straight forward enough: timing is everything. Jonathan has done a great job of making the idea accessible. Hat tip.

“When you are big in Japan” sang German synth-pop band Alphaville in the 1980s. In a few months’ times, the Tokyo Stock Exchange is going to finalise its rules allowing for local active ETFs. A number of managers are, apparently, looking at launching products in the market to take advantage of the listings change. Currently a handful of global players have Japanese ETF businesses but the likely take up of active strategies in the notoriously cautious Japanese market remains far from certain. Even in the giant US market take up of active ETF strategies has been relatively slow. All eyes will be on the incumbents: BlackRock, State Street Global Advisors, UBS Asset Management, Global X and Samsung Asset Management to see whether it is worth having a go. According to Morningstar, more than 280 ETFs trade on the TSE with less than $500bn in assets.

There are lies, damned lies and statistics. The same might be said about earnings reports. With US earnings season in full swing, it is worth considering some facts. Non-adjusted earnings are down 23% versus last year. That means earnings have declined for the third consecutive quarter. However, in a sleight of hand, worthy of a Las Vegas magician, with adjusted or ‘non-GAAP’ earnings, the numbers, magically, show only a 2% decline. Amazingly, US companies have an uncanny knack of finding one-off costs to brighten the picture, annually. Their accountants deserve a medal or two and investors should raise an wary eyebrow.

According to a report from SigTech, only 938 hedge funds were launched last year across the world. Perhaps the ‘only’ seems a little harsh, but in 2020 there were 2,377 and in 2021 an even more buoyant 2,504. Of these only 16 were launched here in Hong Kong. The US remained the number one market accounting for 65% of all launches. It was long/short strategies that were the dominant theme with 181 new funds, even though, it must be said, 2022 was not exactly a brilliant year, performance wise, for the asset class. 121 Cryptocurrency funds came to market, too.

What is more crowded than the MTR at rush-hour on a Wednesday? The stampede to invest in Chinese equities, if a Bank of America fund manager survey is to be believed. Fund managers surveyed are increasingly worried that since the opening up at the end of Covid every portfolio manager and his dog has piled in and the opportunity for easy money is now behind us. Allocations have risen for the third straight month. One to watch, reckons Spy.

Some asset managers may be cutting jobs and trimming their workforce. Not so for Fidelity. The firm announced this week it is adding another 4,000 roles to its business, mostly in America. The company already employs 68,000 staff. The privately-held firm now turns over more than $25bn.

What are the scariest words being heard in the investment market place these days, wonders Spy? “We can’t rule anything out.” These were uttered by James Bullard, head of the St Louis Federal Reserve bank regarding interest rates. With inflation proving far from transient, words such as these tend to give markets a little wobble. And rightly so.

Spy’s quote of the week comes from Vanguard founder Jack Bogle, “Don’t look for the needle in the haystack. Just buy the haystack!”  Whilst Spy does not entirely agree with the sentiment, he can’t deny the pithiness.

Until next week…

Part of Mark Allen.