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Investment Lessons from University Endowments

Recently a familiar theme cropped up in discussion following an article on Bloomberg – that of the potential lessons from investing like the big US university endowment plans.[1] They excite interest due to the vast sums they manage[2] and that they can access some of the best and brightest individuals in academia who are based literally on their door steps. The Yale Endowment Model has been widely publicised and described by the Yale Chief Investment Officer, David Swensen, in his book “Pioneering Portfolio Management”.

The Eighth Wonder

For many investors it can be tempting to focus only on equity prices when thinking about the returns from their portfolios, particularly during turbulent periods such as the one we have witnessed since the start of February this year. The media often fosters this behaviour through the use of dramatic headlines that are designed to grab the attention of the viewer. Recent headlines in this vein that I have seen include, “The Stock Market is Having its Worst Second Quarter Since the Great Depression”. This sounds scary but the reality was more prosaic. As you can see here, this story was written two days into the new quarter and all because of just over 2% move in the S&P 500 index!

Plus ça change

Last week I was discussing with a client the recurrence of similar themes in financial markets across the decades. For example, the ostensible similarities between the “Nifty Fifty” era of the late 1960s and early 1970s and the current fascination with the “FAANG” stocks – Facebook, Apple, Amazon, Netflix and Google parent Alphabet. For those who weren’t around then, the Nifty Fifty stocks were a basket of famous names that were the leading growth stocks of their day. It was said that they were “single-decision stocks” which meant that you could simply buy them and hold them on the basis that they would always grow. They included the likes of Kodak, Coca Cola and Xerox.

Property or pensions for retirement – a very British view?

News this week from Bloomberg announced that US retirement account balances have again hit all-time highs for the third consecutive quarter in 401(k) and IRA accounts, according to data from Fidelity Investments. Whilst this is partly due to the US equity markets continuing to hit all-time highs it also reflects  increased employee and employer contributions to these retirement accounts. https://www.bloomberg.com/news/articles/2017-08-03/americans-keep-crushing-it-with-their-401-k-s

Mayday for the dollar?

Two weeks ago Theresa May’s call for a snap election in the UK may have stunned Westminster but it also caught currency markets on the hop. The pound enjoyed one of its best days in a decade rallying to a six month high against the dollar. It has certainly been noticeable for US taxpayers in the UK with an interest in “Cable” – foreign exchange market jargon for the sterling: dollar exchange rate (GBPUSD). Ahead of the election announcement the market was trading round 1.25 and since then GBPUSD has been as high as c. 1.2950 and is still just above 1.29 at the time of writing. Back in the middle of March it was just above 1.21.

Reasons to be cheerful 1 – 2 – 3

It feels like a lot has happened after 23rd June’s Brexit vote and since then the news flow has been persistently miserable – national footballing humiliation courtesy of Iceland, currency turmoil courtesy of the pound, political turmoil courtesy of the government and opposition parties and even the weather applying the coup de grace with the wettest June on record – as if anything else was needed to cheer up a despondent nation.

Hillary invests in low cost index funds – it’s official!

The latest financial disclosure forms filed by the two leading presidential candidates – Donald Trump and Hillary Clinton – make for interesting reading after their release on Tuesday.

Hillary’s biggest investment between $5million and $25 million was in the Vanguard 500 index fund – a low cost tracker fund with a TER of 0.16% per annum – according to Bloomberg http://www.bloomberg.com/politics/articles/2016-05-18/trump-invested-in-outsourcing-companies-he-denounced-in-campaign

On the other hand Bloomberg notes that Donald Trump holds investments in a number of companies he had denounced on the campaign trail including Apple – even though in February he called for a boycott of the company for refusing to help the FBI unlock an iPhone used by a terrorist in California. Who knew that the Donald could be so magnanimous!

Commentators such as Fortune have previously noted the similarity of Clinton’s portfolio to the low cost investment strategy espoused by her supporter Warren Buffet whereas Trump has historically favoured hedge funds for some of his largest personal holdings – http://fortune.com/2016/05/10/hillary-trump-investing/

Like the election we’ll have to wait to see how their different approaches work out for the two of them…….

By Cormac Naughten

“The Folly of Prediction”

At times of market volatility when bad news is pervasive investors are often left wondering where to turn. Sometimes it can seem tempting to seek out commentators or other “gurus” with decided opinions and seemingly stellar credentials for having identified and called market crises in advance correctly in the past.

We at MASECO believe that making market predictions over the short term and trying to time financial markets is a futile exercise as it is all too often purely conjecture.  An example of this can be seen in the following recent Bloomberg story whereby Goldman Sachs abandoned five of their six  recommended top trades for 2016 –  just six weeks into the year. http://www.bloomberg.com/news/articles/2016-02-09/goldman-sachs-abandons-five-of-six-top-trade-calls-for-2016

Replacing a well thought out financial plan, underpinned by decades of empirical and academic evidence, with one “informed” by predictions can be a dangerous business. Why is it then that we can be drawn in by them when we feel vulnerable?

Professor Steven Levitt of Freakonomics fame offers the following explanation for why bad predictions abound:

So, most predictions we remember are ones which were fabulously, wildly unexpected and then came true. Now, the person who makes that prediction has a strong incentive to remind everyone that they made that crazy prediction which came true. If you look at all the people, the economists, who talked about the financial crisis ahead of time, those guys harp on it constantly. “I was right, I was right, I was right.” But if you’re wrong, there’s no person on the other side of the transaction who draws any real benefit from embarrassing you by bring up the bad prediction over and over. So there’s nobody who has a strong incentive, usually, to go back and say, Here’s the list of the 118 predictions that were false. … And without any sort of market mechanism or incentive for keeping the prediction makers honest, there’s lots of incentive to go out and to make these wild predictions.”

If you are interested in exploring this further the Freakonomics Radio podcast, “The Folly of Prediction”, can be accessed with the following link – http://freakonomics.com/podcast/new-freakonomics-radio-podcast-the-folly-of-prediction/

 

Cormac Naughten

For investors feeling slightly buffeted in 2015 so was Warren…..

According to an FT article on 29th December 2015 Warren Buffett was heading into the New Year facing his worst year relative to the wider US stock market since 2009.

For the man known as the Oracle of Omaha this under-performance came in his Golden Anniversary year at the helm of his conglomerate Berkshire Hathaway with its share price down 11% with two trading days left before year end versus the S&P 500 total return including dividends at c. 3% up on 29th December.

Buffett is known for his long-term take on the stock market, echoing his mentor Benjamin Graham’s view that in the short term the stock market is a “voting machine” whereas in the long run it is a “weighing machine”. This approach stood him in good stead in the era of “irrational exuberance “ that was the dot com boom and bust from which he emerged with an ever stronger reputation and likewise in the recent Financial Crisis Here at MASECO we also include tilts in our portfolio to the type of value companies favoured by Graham and Buffett.

For those who wonder why Buffet is regularly touted as the most successful investor of all time, a clue may be gleaned from his annual letter to shareholders this year in which he estimated the increase in Berkshire Hathaway’s per-share intrinsic value over the last 50 years as roughly equal to the 1,826,163% gain in the market price of the company’s shares!