On plain vanilla and the exotic hunt for Alpha
I was speaking to the CIO of a Europe based pension fund yesterday and whilst I was congratulating him on his rather elegant performance during 2012, he did quite freely admit that it was a triumph of luck over skill and that his overweight in equities had been more due to a fear that bonds had been about to go belly up than a love of equities.
Thus, to some extent, his fund was correctly positioned, albeit for the wrong reasons.
However, the conversation continued along the lines of “What next?” Funnily enough, I recall having had the very same discussion with him this time last year when he was struggling to see where he was going to earn his 4% total return. May I remind that if we do not drop off the fiscal cliff – which is far from certain – that it signals a trading event and not an investing one.
Irrespective of how you look at bonds, it’s hard to see where that kind of money is going to be made. Sure, if plain vanilla risk assets such as cash equities continue to perform, then plain vanilla credit is not in dangerous territory either. But not being endangered and delivering superior returns are not at all the same thing and investors will need to tap new sources of revenue. The last time that happened, we ended up with the sub-prime mortgage disaster. I still favour a broader approach to less conventional asset classes from micro-loans to managed commodity funds.
On the subject of the latter, research suggests that small and start-up commodity funds regularly outperform their larger and more established peers. It is an area where there is clearly no safety in numbers so the reputation of commodity funds and also CTAs to be an investors’ grave yard would appear to be more due to the poor selection of investment vehicles than to a fundamental mis-allocation of resources to the sector. But that will be a subject for another day.
Business flow has slowed although there is still a fair amount of index adjusting and window dressing going on – I suggested on Monday that this might be the last week in which to get anything meaningful done.
Nevertheless, next week is, on the calendar at least, a full five day one and those with cash in hand might be able to profit from the bank’s unwillingness and inability to make efficient markets. Residual buyers are advised to over-communicate lest they be forgotten – silence will be interpreted in the banks’ trading rooms as indicating that they have closed their books for the year.
I will be out tomorrow but should, continental flying conditions permitting, be back on Friday.