Posted inFSA Spy

The FSA Spy market buzz – 28 July 2023

Not so simple investing, abrdn returns absolutely, blue bonds for everyone, fee pressure at St James’s Place, S&P 500 turnover per person, China’s personal debt boom, active managers get on board and much more.

During the great, and with hindsight, utterly misguided global lockdown, some apocalyptic pundits all over the world claimed that a new human reality was dawning on mankind when we would voluntarily spend more time apart and large-scale gathering might never bounce back to pre-Covid levels. Spy never bought this nonsense on the basis that most people like to see other people, especially at a pub, where they can flirt and chat. Live Nation, the world’s largest concert organiser, sold 150 million tickets to live concerts in the last quarter, alone. Combine that news with packed aeroplanes and the world has well and truly defied the lockdown doomsters. A very good thing too. If there is a lesson to be learned, never extrapolate a trend in a linear fashion forever.

Simple: Easily understood or done (Adjective). Spy is under the impression that something simple is rather easy to do or straightforward to understand, as per the dictionary definition. He was therefore a touch amused that an asset manager that calls itself Simplify has launched the Multi-QIS Alternative ETF. The fund will, not so simply, invest “in a diversified portfolio of third-party quantitative investment strategies across equities, interest rates, commodities and currencies. Each systematic strategy is designed to capture proven market return premia”. If that sounds simple or a simplified investment strategy, Spy has a chocolate teapot to sell you. These complex, grandly described strategies are falling out of favour. Just look at GARS.

Yes, the grandaddy of absolute return funds managed by abrdn, once the UK’s largest single fund, is being rolled into another diversified strategy, ending an era. GARS used dozens of different strategies in combination, in an attempt to smooth out the investment returns over a given period. An ambitious and laudable aim, for sure. After an initial good run, the sheer complexity of the strategy appeared to get the better of it and performance lagged the market. Spy has heard some rather unrepeatable commentary about GARS as managers turned on the idea. Spy, for the record, is not against complexity in investing, but he holds a high watermark for the return ambition to make any complexity worth it.

We have all heard of green bonds. That bandwagon has been rolling for years. Spy came across a new term this week which caught his eye: blue bonds. Spy grew up in a decade when ‘adult films’ were referred to as blue movies; luckily this has nothing to do with that industry. No, a blue bond is, apparently, one that focuses on sustainable investment in the oceans and all things marine. Far less salacious, and to be fair, more worthwhile. Frankfurt-based Solactive has launched the Solactive Blue Bond Index, which will help investors target the blue economy, which is, apparently, worth 5% of global GDP. Think eco-friendly shipping, sustainable fishing, marine rehabilitation and more.

Spy has been hearing for years that there is fee pressure for asset managers. The rise of ETFs has brought costs down dramatically across the most popular asset classes. This week, St James’s Place, the UK wealth manager with offices in Hong Kong and Singapore, announced it was cutting fees for its clients. Across its suite of bond and pension investments, costs will be lowered, which may in time cost the firm as much as £1bn ($1.28bn). The stock market did not like it much, whacking its shares, but SJP’s 65,000 clients should benefit. Interestingly, it was not so much competition that forced the change but the regulator.

How does technology drive profitability? Well, for one, tech done well enables firms to make so much more money with fewer staff. Look at this stunning chart below. It tracks the number of staff required to produce $1m of income, over time. Studying the S&P 500 firms is instructive, as American firms invest so heavily in tech. According to data supplied by Bank of America, it took eight workers in 1985 to produce $1m in turnover and today it is less than two. Even taking inflation into account, that is stunning productivity.

Charts that make you go ‘hmmm’. China is accumulating a rapid amount of household debt. There is now so much personal leverage in China, according to Barclays, that Chinese households have exceeded the comparable amount held by Americans before the GFC in 2008/2009. History may not repeat, but it sure does rhyme.

Do you know anyone who uses Meta’s Oculus virtual reality headset, regularly? In Spy’s anecdotal research, the novelty of the devices soon wears off. That truth must be rather disappointing, because Meta’s Reality Labs unit has lost a total of $34bn in just 11 quarters, with nearly $4bn in the last quarter alone. Talk about virtual jam tomorrow.

Fact of the day: When the S&P 500 was at 3,500 last October, active fund managers had less than 20% of their resources allocated to equities. Today, their equity exposure has leaped above 100% (leveraged long) with the S&P 500 above 4,500. This is the highest exposure since November 2021.

Until next week…

Part of the Mark Allen Group.