Date: 2016-08-28
Investment commentary
Late last year, I have concluded that I must focus more on relative value assessments than on absolute ones, and so the fund's turnover ended going up significantly. In retrospect, the call on the shift in the mindset was a good one, as my worst performing holdings were more value oriented ones and the opposite is true for the growth companies in niche markets, where more frequent weight adjustment was needed. Even so, my turnover was probably still too high. It must be my stylistic weakness. At large, asset price levels have departed from the fundamentals a while ago, and the trend continues. I see many who argue that this rally will have a miserable ending, referring to the trailing and estimated forward valuations. While I share their sentiment in that this rally will end at some point (this is a pretty safe thing to say), I do not think it will be the lofty valuation metric that will punish investors. While valuation still is a good guide for the market levels, those who focus on funds' short term flow are likely to achieve better results than the value oriented players. Even if we were to look at the underlying fundamentals, given the rate environment and increasingly limited number of properly functioning market segments, the direction and magnitude of top and bottom line growth seems much more important than the valuation norm.
If one were to wish for high investment returns, he or she would be better off focusing on the economies and sectors whose growth momentum would be unleashed within few years. For now, I tend to think that investment return on these countries and sectors may still be lower than what one would have gotten in the past in the event of the same sort of growth. However, the opposite would not surprise me. There could well be certain premium on the assets that show surreal kind of growth in their underlying businesses, due to the scarcity. On top of that, cash is currently held by corporations, and they had better consume the cash before it is taken away by national authorities; M&A activities are likely to continue even in the low growth environment. Relatively small players that force investors to take a specific directional stance deserve more attention than those relatively 'stable' ones that often make investors be relaxed. Investors had better have a strong-specific opinion on the concept of risk, as I expect investors to be constantly challenged against their risk averse nature. When the investment community is collectively in a moral hazard mode, and when the central banks push people further into the moral hazard zone, it becomes unclear who the loser will be: those who stubbornly fight against the morally hazardous consensus or the yielding ones, especially given that the timing of the turn of this tide is unclear. Bright side of high volatility environment needs to be better understood, because markets continue to fluctuate.
I believe that the efforts many investors put in to seek for "safe" positive yielding assets will be proven to be futile. Among them, some sophisticated and open minded ones will end up chasing after yields in exotic locations, and those who are not willing to increase their exposure to these emerging or frontier markets, where there has so far been a low monetization of economy, may not secure enough yield for their survival. Some other groups of ex-yield seekers will probably give up on expecting yields, and while these people may have a better chance of survival compared to those in denial, they still are likely to be much less stable in their behavior than before. Due to their tendency of stickiness to guidelines, they are likely to be turn out to be vulnerable in fast-changing liquid market environment, where erratic trading tendencies are likely to be much more widespread. This is ironic because they seek for stability while they are erratic themselves. I expect this last group to contribute significantly in building bubble in increasingly rare niche growth sectors. Some others may decide to give up a significant degree of liquidity for the return sake, and I am in favor of this approach. Sadly, this becomes one more factor that widens wealth disparity, and this is likely to be destabilizing. Theoretically, for those assets whose income stream is sustained without additional investments, the cheaper they get, the better it is for the long term holders, as the received yield could be used to increase the stake. However, I expect something different; one way or another, public entities who eye on rare and healthy income are likely to make claim for their cut from these assets, which most likely are utilities.