The main story of the week that has been titillating financial and tech markets, has been the sacking and rapid rehiring of Open AI’s CEO, Sam Altman. ChatGPT’s parent company has been, err, “generating” a lot of heat and causing a fair number of “hallucinations”, to use a phrase. Apple sacked Steve Jobs in the 1980s and foolishly took twelve unproductive years to bring him back and save the firm. It seems Open AI has learned a whole lot quicker than Apple did. The real story, for Spy though, is that this may well mark the high point of AI’s yoghurt munching, muesli crunching change-the-world company mission statements and boards dominated by altruistic fell-good ambitions, instead of a ruthless focus on profits. And that, can only be a good thing.
The juggernaut continues. This week Fidelity converted no fewer than six of its actively managed US-based mutual funds to an active ETF structure. All the strategies are from the “enhanced range” and include Enhanced Small Cap ETF, Enhanced Mid Cap ETF, Enhanced Large Cap Core ETF, Enhanced International ETF, Enhanced Large Cap Value ETF, Enhanced Large Cap Growth ETF. These six funds are fully transparent and are priced tightly with expense ratios of between 0.18% and 0.28%. Fidelity sees the funds as core building blocks for a portfolio. Spy remains convinced this is the direction of travel for the industry – traditional active strategies being converted to the more convenient ETF structure for distribution and utilisation by wealth managers.
Lithium, the building block of the global EV revolution must be a sure bet. Or perhaps not. The rare metal, which was the darling of the commodities block has had a very tough year. Capitalism, unfortunately for speculators notes Spy, is remarkably good at finding scarce materials when prices rise rapidly and so it has proven with the most hyped metal of the last decade. Supply has flooded the market. The spot price of battery-grade lithium carbonate, trading in Shanghai and serving as a benchmark, dropped this week to RMB 133,500 ($18,813) per tonne, down 77% from the peak a year ago, and below where it had been in 2017. In February, Global X’s Lithium & Battery Tech UCITS ETF was trading at $12.77, now at $8.72 – off a nasty 30% or so.
Fool me once, fool on you. Fool me twice, fool on me. Or so the old saying goes. It raised Spy’s eyebrow this week to see that people are back trading NFTs (non-fungible tokens). Remember those dancing monkeys and naïve art works selling for millions? According to a Bloomberg report, “Earlier this month, an image of a pet rock sold for the equivalent of more than $200,000 in the NFT market. If one is foolish enough to think this is a good investment, Spy must introduce you to some 6 times leveraged VIX futures strategy that is a “dead certainty”.
This is an old report, but Spy rather liked it because it instinctively feels true. A Journal of Finance article in 2018 reported that wealth managers who drive flashy sports cars are more likely to underperform wealth managers who do not drive a sports-car. Those fast drivers underperform non-sports car drivers by an average of 2.92% per annum. This comes as no surprise to Spy who has a sceptical feeling about both flashy cars and flashy offices. Here in Hong Kong, it seems to be a badge of honour to be in a prestigious building, regardless of the fact that clients will have to pay those sky-high rental costs in fees.
Years ago, Spy heard a China equity fund manager complain that large cap, dominant companies in China were forced to do “national service” and that was the reason he did not favour them. What he meant by this was, that once the company became too large, political considerations and societal obligations became a dominant factor in potential returns as the firm was expected do something beyond its shareholders interests. Spy was reminded of this perspective this week, as a Chinese legislature statement released on Wednesday, cited unnamed lawmakers as saying: “There is still “a lot of room” for China’s financial sector to sacrifice profits for the sake of the real economy. ‘Sacrificing profits’ sounds a lot like “national service” to Spy. According to National Bureau of Statistics data, the finance industry contributed a healthy RM 9.68trn, about 8% to China’s GDP last year.
At one point it appeared that the Big Three of the ETF world: iShares, Vanguard and State Street would dominate the ETF space for ever. As recently as a decade ago, beyond these three players, “the rest” only made up about 10% of ETF flows. This year, “the rest” took in 45% of net flows, which is their biggest grab ever. The new pack is led by firms such as led by J.P. Morgan Asset Management and Dimensional Fund Advisors, who have brought low-cost, innovative strategies to market, as well as a host of other players who now contribute a fat tail to the industry.
Until next week…
