Posted inFSA Spy

The FSA Spy market buzz – 5 May 2023

Cash Cows, Liontrust buys GAM, Vanguard and negative TV, Janus Henderson and the bond market, thematic investing’s steep recovery path, ChatGPT reaches 100 million, wisdom, Ferraris and much more.

Spy can remember during the great financial crisis, the GFC to its friends, that Singapore and Hong Kong banks were being begged by depositors to take more of their cash as they fled American and European alternatives. The current banking woes in the US, triggered by rapidly rising rates and creative lending policies is yet another reminder of how prudently Asia has managed its growing resources in the last two decades. As one commentator put it this week, “Failing banks stop lending. Struggling banks scale back lending. Challenged banks do not raise loan-to-value ratios. Troubled banks do not negotiate new loan deals.” For all of our sakes, we had better hope that American policy makers get this sudden run on confidence under control.

Hats off to Pacer ETFs, reckons Spy. They have a series of funds named “Cash Cow”. As a marketing name, it is genius. After all, who would not want one of those in their own field (or bank account)? The firm has just launched the US Small Cap Cash Cows Growth Leaders ETF, trading under the ticker, CAFG. The fund invests in the 100 companies in the S&P SmallCap 600 Index that have the ‘highest free cash flow margins’, which translates to a firm’s free cash flow divided by its sales. The Cash Cow idea is certainly working for Pacer – the firm has now got $17bn in assets in its Cash Cow collection of ETFs.

So, the GAM drama finally draws to a close as British asset manager Liontrust snaps up the firm for a mere £96m ($121m), creating a combined manager with £53bn in AuM. Price is what you pay, value is what you get. Will Liontrust get much value from the acquisition? Based on the regulatory and infrastructure cost of creating entities across the world, one can certainly see this adding some base value to Liontrust, creating distribution opportunities. Will clients and the best staff hang around, wonders Spy? That is a trickier question to answer, let alone taking into account potential market performance. Still, Liontrust is certainly adhering to one rule: buy when an asset is low.

The battle for ESG has taken an interesting, and some might say, dramatic turn. Climate activists are not letting up targeting Vanguard after its decision to exit the Net Zero Asset Managers climate alliance. TV adverts have appeared in America berating the firm for its stance, with sombre and alarming messaging about the world’s second largest manager, including one with the line, “When you save with Vanguard, you’re an owner of a catastrophic climate future.” The politics around climate change is becoming shriller with every passing week. Passionate (and Spy might say, self-righteous) activists are leaving little nuance to the debate. It is a “with us or against us” mentality that does not allow for much thought to the complexity of the problems.

Have rates peaked in the US? Janus Henderson seems to think we are almost there. In a blog post this week, global bonds portfolio manager Jason England writes, “In the game of chicken between the US Federal Reserve (Fed) and the bond market that has been going on since last year, the US central bank won out by reaching its stated terminal rate of 5.25% for this tightening cycle….bond investors need to recognise that the days of chasing yield are over…[and] can begin thinking about shifting toward an opportunistic stance within the global market.” Sounds like toe in the water to Spy.

Thematic investment, or investment by numbers, as Spy likes to call it, has had a phenomenal run. In the last five years or so, about $700bn has flowed into thematic funds. Unfortunately, so much of that investment, more than 65% of it, arrived just when those themes were peaking, price-wise. Thanks to Morgan Stanley, Morningstar and Kensho for this little chart, which shows how much a particular thematic index will need to recover for those themes to be performing once again. For example, genetic engineering needs to jump 172%, autonomous vehicles 116%, even smart buildings need to climb 76%. A little way to go then.

Spy may be a bit of an AI sceptic, but he can’t beat the numbers. How long has it taken ChatGPT to reach 100 million users? A mere two months. That’s right, just 61 days. By contrast Twitter took 60 months. Uber took 70 months and Netflix 120 months. ChatGPT’s “wow” factor is certainly capturing the imagination. Thanks to UBS for the data.

Spy read an article this week describing Warren Buffett as dishing out “folksy wisdom”. Spy is not sure where folksy wisdom stops and real wisdom starts. After all, Buffett has made $100bn dollars. Surely it is not the slightly pejorative “folksy wisdom” the chap has, but good old-fashioned wisdom and probably with a capital W.

So, Fedex has announced it is moving its Asia Pacific regional headquarters to Singapore. Whichever way Hong Kong tries to spin this, it is not a good look. The Hong Kong government will never fully appreciate just how much damage its lockdown policies did for its global ambitions.

Ferrari had their results out this week and proved what every high-flying football, Hollywood and banking star already knows: their cars are in volcanic demand. The waiting list for a new Ferrari now extends into 2025. Their Daytona SP3 model, of which Ferrari only plans on making 599 units, has a starting price of $2.25m and was sold out before its unveiling. The rich get richer and the poor take the bus, muses Spy.

Until next week…

Part of the Mark Allen Group.