Spy was enjoying a rather lethal combination of Old Fashioneds and Negronis on Wednesday with a deeply experienced wealth manager in Hong Kong. The conversation revolved around everything from portfolio construction to market forecasts to retaining clients and the challenges of building a quality wealth management firm. She observed, “You can make every prediction in the book, you can work as hard as you like, but in the end, as the great Jeff Bezos noted, ‘reality is an undefeated champion.’” Liza Minelli once claimed that ‘reality is something to rise above’, but in truth, between the folksy wishes of Hollywood and the cold hard edge of market capitalism, Spy reckons Jeff is right.
When Spy was a child (in a distant bygone era), teachers would often say, “You have to include everyone or you can’t do it.” China must be wishing for a touch of that inclusive kindergarten spirit, if recent fund launches are anything to go by. Dimensional Fund Advisors is the most recent manager to launch an emerging markets fund that specifically excludes the mainland. The Dimensional Emerging Markets ex China Core Equity ETF is an actively managed strategy, listed in New York, that is taking on the likes of iShares’s passive MSCI Emerging Markets ex-China ETF, which has gathered a rather healthy $17bn in AUM. It seems a fair amount of money remains rather China-sceptical.
JP Morgan Private Bank has been looking at the year ahead and has produced its annual forecast. It is optimistic, for sure, notes Spy. Politics has a been a big part of the story in 2024 and the bank has the following rather fascinating anecdote: “The US election may have dominated investor focus in the second half of 2024, but the impacts of the global election super-cycle will be felt in 2025. Around the world, a clear trend emerged. For the first time since the data were recorded in 1905, every single incumbent governing political party in developed economies that faced re-election in 2024 lost vote share.” There is no doubt in Spy’s mind that voters, around the world, are very restless indeed.
In the same report referenced above, Spy was staggered to learn that: “Over the past year, US household net worth has climbed to a record of nearly $160trn. ECB data suggests that household wealth in the Eurozone has grown to €60trn ($62.8trn) from less than €50trn before the pandemic. Since 2019, millennials (born 1981–1996) have nearly doubled their net worth, which is now higher than that of Gen Xers (1965– 1980) or baby boomers (1946–1964) at similar ages.” Considering the fact that many Xers don’t feel wealthier, the bigger question is, why not?
Is there a massive, untapped opportunity for private assets in the wealth management space? Schroders certainly believes so. The British manager has conducted some research, and in their words, the results “indicate that globally institutional investors had allocated, on average, 14% of their portfolio to private assets.” No real surprise there, reckons Spy. “In comparison, typical clients’ allocation to private assets for most financial advisers and wealth managers globally ranges between 5% to less than 10%. For 30% of wealth managers [Schroders] surveyed, the allocation to private asset investments, is even lower, at 1% to less than 5%.” It may well be the case that wealth managers under-allocate less but, in the end, liquidity is the key and until that problem is ameliorated, Spy can’t imagine the growth in the wealth segment will move very much.
Every now and then, an investment manager sums up the state of play so pithily it is worth repeating.
Clyde Rossouw, head of quality at Ninety One, wrote in a piece on the perils and opportunities of AI, “AI will soon be able to do many things we thought only humans could do and do many things that humans simply cannot do. However, the difference between ‘tourist’ users and those that have been trained to use AI is profound. Proficiency at prompting is key; much like accessing a database, speaking the appropriate query language is vital to ensure accurate results.” Spy has noticed this, too; Learning to use AI, is like any other skill, it requires an adaption to the way the models work and those who do are likely to see outsized rewards.
For the better part of the early 2000s, it seemed Germany was unassailable. Their engineering success and those fabled ‘Mittlestand’ companies seemed the ideal backbone of a high-income country. Now Germany is mired in recession, anger at sky high energy prices is fuelling populist politics and the government has just collapsed. From an investor point of view Germany has too few global champions to get excited about either. The total market cap of German companies, as a percentage of global market capitalisation, has dropped to less than 2%. Only two German companies, Siemens and SAP, are ranked among the global top hundred by market cap. And, if Spy is being ruthless, SAP is largely American these days. How does one say ‘ouch’ in German? The next time you hear a pitch for a European equity fund, Germany’s woes must present an opportunity or, indeed, a warning.
Spy’s quote of the week comes from Mark Hanna, an American political wirepuller in the 19th century, who once quipped: “There are two things that are important in politics. The first is money and I can’t remember what the second one is.” Nothing else required.
Until next week…
