Posted inFSA Spy

The FSA Spy market buzz – 24 March 2023

Bitcoin rolling futures, new fund pricing models gather pace, greenbleaching, sustainable bonds (not), thematic investing at the top; consultant jokes, Munger’s wisdom and much more.

Spy felt like he was going back in time this week. The term ‘credit crunch’ was used by an Aussie equity portfolio manager over a double espresso in Central. Like Jack Nicholson’s psychopath in horror classic, The Shining, it seems credit crunch is yelling, “I’m back!”. The obvious cause of the woes is dramatically rising interest rates causing wobbles everywhere as cheap credit is withdrawn faster than a politician changes his opinions. Nervousness is stalking the markets as investors wonder which over-leveraged corporates, banks, property funds and hedge funds are swimming naked as the tide rolls out. The short answer: far more than people would like to admit.

A few months of crypto showing signs of life and already the ETF players are having another spin of the wheel, notes Spy. On this occasion, Bitwise Asset Management has launched a fund that is exposed to Bitcoin futures but, because that is not quite exciting enough, has added in an “advanced rolling strategy”. What is an advanced rolling strategy you ask? Good question! According to their blurb, the strategy exploits “the shape of the Bitcoin futures curve”. Specifically, “the ETF seeks to outperform traditional bitcoin futures ETFs by minimising potential pricing inefficiencies that can emerge in ETFs focused on front-month bitcoin futures contracts”. Of course it does. In the week that Coinbase and Block are getting hammered as doubts linger over their underlying business models, Spy would suggest this fund is only for adrenalin junkies.

Spy has seen a fair share of pricing models for funds around the world. ETFs over the last two decades have emerged as the cheapest possible way to gain exposure to specific asset classes. Hedge funds or private equity, with high performance fees, arguably the most expensive. Spy now reads that an asset manager is combining ETF pricing with performance fees for an entirely new fee model. Aperture Investors, founded in 2018 and based in New York, founded by former Alliance Bernstein CEO Peter Kraus, is blazing this trail. The idea is that if one of their funds delivers performance below its benchmark, the fund only charges ETF-like fees. However, if their fund outperforms, it takes a 30% performance fee. The pitch is straight forward: you pay for alpha. It seems the idea has appeal; apparently Aperture has rapidly amassed $4bn in assets. Spy will watch with interest if other active managers around the world adopt this model.

Spy, and he is sure all of you, has heard of greenwashing. How about ‘greenbleaching’? This is the opposite, apparently. It is when a fund or investment strategy is so strict on its ESG criteria that the choice of potential investments diminishes to the point of unviability. Green investment is fraught with so many contradictions, ambiguities and competing political considerations, Spy can easily see the dilemma. Finding the sweet spot between greenwashing and greenbleaching seems an almost heroic, Sisyphean task.

Talking of green, it seems that a number of ESG funds have been wrong-footed by Credit Suisse’s Additional Tier 1 bonds/CoCo’s debacle. Lazard, BlackRock, Franklin Templeton and others held CS’s AT1/CoCo debt in some of their European sustainable fixed income strategies. This certainly raises a wider question on why these funds held this debt and what criteria was used to assess their sustainable eligibility?

Thematic funds anyone? Not so long ago, asset managers rushed to provide thematic equity along the electric vehicle supply chain. This, naturally, included source materials for the batteries. Lithium carbonate prices were sky high due to shortages and ferocious demand. As sure as night follows day however, that price squeeze has now turned to bust as lithium carbonate has dropped through the floor. The price has tumbled by 50% since November in the Chinese market. The drop is being blamed on a withdrawal of subsidies for EVs by the Chinese government. Spy’s wider point is that the moment a raft of thematic funds come to market, it very often represents an interim peak in that sector. There is an old saying, if it is in the news, it is in the price. That should perhaps be updated: if there is an ETF launch, it is in the price. 

Old joke: What is a consultant? A person who takes your watch and then tells you the time and charges you for the pleasure. With the news that Accenture is cutting 19,000 jobs worldwide, Spy is reassured that many weary corporate citizens will be able to continue telling their own time with their own watches, for free.

Over the years many alarmist books on investing have been written. Spy has lost count of the number of books he has seen predicting everything from the end of the dollar to the death of gold, and so on. Most have proven wildly inaccurate. Spy, therefore, might have ignored this one written by Scottish investor, Alistair Nairn, 18 months ago. However, after a recommendation from a friend, Spy decided to read it. It is titled, The End of The Everything Bubble. It rather presciently captures the end of the recent central-bank-induced exuberance and is worth a read for your next flight.

Spy’s quote of the week comes from Charlie Munger, the other half of Berkshire Hathaway’s leadership. “Wisdom is prevention”, says Charlie. That is spot on, reckons Spy. Stop losing money and making money is a whole lot easier.

Until next week…

Part of the Mark Allen Group.