The investment community has long been mainly the preserve of men. However, in the immortal words of Bob Dylan, ‘the times they are a changing’, and with them we bear witness to progressive developments beyond the obvious, and undoubtedly a force for good, which we would like to explore and share with you.
A little over two weeks ago the coast of Oregon paid host to a total eclipse of the sun. It began at 9:06am local time, when the sun’s glaring disc started to develop a small but growing dimple. By 10.19am the sun’s indomitable force was reduced to a bizarre glow, a doughnut of light in the sky punched through the middle with cosmic blackness, as a curious dusk temporarily descended on the millions that had gathered to witness the event. Total eclipses of the moon are rare, and worth celebrating, and those that have witnessed them profess to never forgetting them. We now understand the science behind them, but ancient cultures saw dragons of the sky devouring their sun, and tried to frighten them away with whatever weapons were to hand. Or they represented great omens of the future, tools for fortune tellers and soothsayers alike to work their magic.
Risk budgeting can be a relatively straightforward exercise and, if highly personalised, is an essential step in the execution of a successful wealth plan. At MASECO we budget for risk by thinking both about the ability to take risk, which tends to be governed by the investment horizon, and the willingness or tolerance to take risk, which tends to be more individual. An example can help illustrate this concept. An individual may have a low tolerance for risk, which can be evaluated by how easily they sleep at night during times of market volatility, but at the same time may have a relatively high ability to take risk, if for example investing to meet their retirement needs in 25 years’ time. There is no exact science to this, but assuming that the goal is to maximise returns over the 25 year investment horizon, the greater the risk they can tolerate the greater the expected returns over the period, and the more successful the outcome is likely to be. However, if they take on too much risk compared to their risk tolerance, they may find themselves falling into the behavioural finance biases of divesting from the portfolio when the markets are down. This most likely leads to missing out on the ensuing recovery, thereby significantly reducing the return over the 25 year cycle. It is up to the skill of the adviser to recommend a risk budget that can fulfil both criteria.
This weekend saw a return of the annual City Ski Championships, which Verbier played host to for the 2nd year running. Since MASECO’s humble beginnings back in 2008, we have doggedly fielded a team, but in keeping with our entrepreneurial spirit, it has tended to be a triumph of optimism over reality. There have been occasional individual successes, but the team event has always alluded… That is until the great year of 2017! We are delighted to report a changing of the guard: Messrs Matthews, Dorman, Armitage and Capuano (aka Team MASECO) rose to the occasion, and were the fastest men on the mountain on the day, with significant support from Messrs Sellon, Findlater and Flonaes. For full disclosure Will Armitage and Ted Capuano are technically “friends” of MASECO rather than fully signed conscripts, but definitely not “ringers” in spite of murmurings from the competition.
Back in 2008, around the time of MASECO’s inception, iShares were quick off the mark to set up an exchange traded fund investing solely in global green-energy stocks. The world was on its knees, but green energy offered a rare ray of sunshine, if you will excuse the pun, and green energy stocks were very much in fashion with prices to match, so this seemed like a great idea from iShares. But sadly fashions do not endure, as the dot com boom painfully taught us, and today the iShares ETF is down an eye-watering 79% since its inception (Source: Morningstar). However, the good news is that there are other ways to vote with your feet and “go green” from an investment perspective. While the very narrow class of green energy stocks had had a turbulent time of late, it is not all doom and gloom for tree-hugging investors – far from it. A more sophisticated approach is to start with a broad asset class, for example the MSCI All Country World Index (ACWI), and then overweight companies with the greatest green credentials, while underweighting or screening out entirely those with the worst track record. Blackrock has recently published a paper claiming that it is possible to track the MSCI ACWI with an annual tracking error of just 0.3%, while investing in companies with annual carbon emissions 70% lower than the index as a whole (Source: Blackrock Investment Institute). 30 basis points seems like a reasonable trade off to lower the emissions billowing out of your portfolio by a whopping 70%. There is also the additional cost of carbon screening, but this tends to be a fairly manageable 10 basis points or so (0.1%).
I hope you enjoy this amusing anecdote that pokes holes and fun at the UK tax system, but in doing so raises some serious points that I am sure will resonate. It is attributed to David R. Kamerschen, Ph.D., Professor of Economics
Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.
If they paid their bill the way we pay our taxes, it would go something like this: –
The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.
So, that’s what they decided to do.
The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers”, he said, “I’m going to reduce the cost of your weekly beer by £20. Drinks for the ten men would now cost just £80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fairer to reduce each man’s bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.
And so, the fifth man, like the first four, now paid nothing (a 100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).
Each of the last six was better off than before with the first four continuing to drink for free. But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10″
“Yes, that’s right,” exclaimed the fifth man. “I only saved £1 too. It’s unfair that he got ten times more benefit than me”
“That’s true” shouted the seventh man. “Why should he get £10 back when I only got £2? The wealthy get all the breaks”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor”. The nine men surrounded the tenth and beat him up.
The next week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important –they didn’t have enough money between all of them to pay for even half of the bill.
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.”
David R. Kamerschen, Ph.D.
Countless tomes have been written on the causes of bull and bear markets, but have you ever wondered on the origin of these charging euphemisms….? I was recently alerted to the following notice posted on a display in the museum of the San Miguel Mission in California. We learn something new every day….
Bull and Bear Baiting
The grizzly bear was the largest creature in California. The Spanish and Mexican rancheros began to use this noble creature for entertainment. The left rear paw of the bear would be tethered to the right front leg of an enormous bull. The animals would then fight to the death. The bear would usually be gored to death by the upward motion of the bull’s horn. The stooped shouldered bear aggravated its own fate by downward thrusts, often impaling it’s paunch on the shaped horns.
After seeing one of these events a San Francisco merchant coined the phrase “bull market” for a period of rising values for stocks and commodities, and a “bear market” for when values declined like the downward thrusts of the bear. By the 1860s, the grizzly bear was hunted into near extinction.
Last week the IMF invited the Chinese yuan into the basket of foreign currencies it uses to as its unit of account known as Special Drawing Rights (SDR), joining the dollar, euro, pound and yen. This marks a significant step towards what some commentators see as an eventual bid against the dollar to become the global reserve currency, and certainly a growing commitment to let market forces play a greater role in setting its exchange rate.
Prior to extending its invitation, the IMF demanded the People’s Bank of China (PBOC) make some changes to their currency regime, most notably to tie the day’s opening exchange rate to the prior day’s close. This may seem somewhat elementary to a free floating exchange rate, but previously the day’s opening rate was in effect set at the whim of the PBOC, often creating a meaningful gap against the prior day’s close. This is the technical story behind the 2% devaluation in August, the spark that wobbled global markets, particularly in the emerging world.
Since then the Chinese have been forced to use more traditional methods to maintain the yuan’s effective tie to the dollar, namely selling dollars to buy yuan, which has seen their global reserves fall from a peak last year of $4 trillion down to $3.5 trillion today, a meaningful decrease of some 12%, fighting to keep pace with an appreciating dollar.
So where does that leave things today? It is unlikely that China will embrace a full-throttle free-float exchange rate anytime soon, and there is certainly a lot left in the tank to maintain its de facto peg against the dollar. But against that backdrop, now that the yuan is a signed up member of the IMF’s SDR, the Chinese by extension have pledged to reduce the intervention that has been propping up the yuan for so long. In short this means a weaker yuan may be on the horizon, particularly given the Fed has finally started its much discussed commitment to increase interest rates, which in turn could see further upward pressure on the dollar.
There is a long road ahead before the yuan could pose any realistic threat to the greenback’s exalted position of global reserve currency, but the prize at the end may be worth the fight; and if it means a less controlled yuan, that has got to be a long-term boost for global trade.
Gold dipped below $1100 on Monday, a 5-year low, and a far cry from the heady days of 2011 when it peaked at an eye-watering $1,921. Back in those heady early days of the financial recovery, gold bugs were on their soap boxes spreading the word that gold, the ultimate safe-haven asset and hedge against inflation, was just getting warmed up, and would smash the $3,000 barrier before the year was out. They proclaimed it was the only asset class to have held its value since biblical days, which as it happens is tough to argue against, but is a little short of the full picture.
One of the problems of owning gold is that it doesn’t do much more than look pretty, albeit mighty pretty it does indeed look across the right neck line. The point is that it doesn’t produce any income. So, although gold has indeed held its value since biblical times, that is to say it has made a zero real return in 2000 years, which is a little less seductive. And then there is the volatility. It was around 15 years ago (1999-2002) that Gordon Brown, with spectacular timing, famously sold half the UK’s gold reserves at an average price of $275 to balance the books, in what wags have since dubbed “The Brown Bottom”.
So, for the above reasons, though we think gold is magnificent in the decorative sense, we do not believe in it as an asset class. The lucre of gold might have been responsible for one of the greatest Bond villains of all time (and who could forget his talented first pilot Pussy Galore), but that is where the story ends.
At MASECO we are always looking into ways to improve risk adjusted returns for our investors, adopting robust and academically proven strategies that are not only understandable, but also intuitive. As we see it, the issue with hedge funds is that they tend to adopt black box strategies that are hard to untangle, and their fees err to the high. That said, there are always exceptions out there, and we hope that one day there may be a new generation of cheaper hedge funds with more transparent strategies.
So we are not wholly in agreement with the blog piece below, but regardless we wanted to share it with you, as it is both thought provoking and fun to read, if a little broad based, and simplistic in terms of the fee structure.
Below is a blog on the subject, written by Dan Wheeler, who recently retired from his post as Director of Financial Adviser Services with Dimensional Fund Advisers, which he held for over 20 years. We hope you enjoy.