A table that can hold some hotheads, who believe that the market is something like a casino, and «I will lose now, I will win back later.» The first left column is the drawdown of the portfolio. The second column shows how much the portfolio should grow in order to restore its initial value. The next three columns show how many YEARS will be needed to restore the portfolio to its original value with average annual returns of 10%, 7.5% and 5%. Take for example the drawdown of 50%. To restore a portfolio, you need to earn 100% for the rest of it. With an average yield of 10% per annum, this will take 7.27 years, at 7.5% per annum, 9.58 years are needed, and at 5% per annum, 14.2 years already. Intuitively, we all understand that. But with numbers in front of you, it may be much easier to control the risks.
Last week, the ratio of gold miners to gold prices (GDX / GLD, green line) added 3%, while the metal itself fell slightly in price. Such differences in the dynamics of the base metal and industry stocks occur periodically, and we have repeatedly considered them. But this time, the unusual thing is added by the fact that gold has not grown even against the background of a temporary, but confident risk aversion. This risk aversion reflected both broad asset classes (Trezheris in the black, stocks in the minus), and inter-sectoral dynamics of the stock market (in the positive, protective Staples and Utilities, in the minus Technology and Cyclicals). In my opinion, all together it increases the probability of catching up from the side of gold this week. Firstly, the leading dynamics of industry stocks is often a leading indicator for the metal, and secondly, there are no reasons for a sharp return of risk appetite to the markets, which can also help the demand for gold. Disclaimer: this reasoning is not a recommendation to buy gold (this decision is made independently)
Against the background of ongoing price wars between management companies and constant pressure on commissions, the question increasingly arises: «What do we pay an active manager for?»
Often this issue is provoked by the Criminal Code itself, which deals with the so-called “closet indexing” — that is, they take a commission as for active management, and in fact, they form a portfolio that is as close as possible to the index. In such a situation, it is really not clear why to pay them 1% per annum, when you can simply buy an index fund for 0.1% per annum.
Today in the Financial Times published an article that offers an interesting way to solve this problem. It proposes to use to calculate the «honest» commission of the so-called. «active share» of the portfolio. Usually, MCs publish the «active share» indicator, but investors somehow ignore this value, concentrating only on the amount of commissions.
How should this work? For example, some active fund declares that its management fee is 1% per year, and the “active share” of a portfolio is 50%. This means that the «passive» portfolio share also accounts for 50% of the portfolio and is managed as an index. That is, for this half of the portfolio a fair commission, for example, 0.1% per year. But then it turns out that the real commission for that part of the portfolio, which, in fact, is actively managed, is as much as 1.9% per annum. And this can already radically change the perception of investors and the competitive landscape.
In my opinion, a useful proposal that will help to look behind the scenes of the process and see who is worth.
An interesting article in Bloomberg about how business views differ from the largest providers of ETF- Blackrock and Vanguard. While Vanguard has relied on super-low commissions and price wars, Blackrock is trying to find ways to charge higher commissions for some products. So far they have done it well — the diagram shows that in the company’s revenues 48% comes from funds with a commission of 0.4% per year, while at Vanguard, which has relied on individuals, 92% of income comes from funds with an annual commission less than 0.2%. Higher commissions are willing to pay institutional and hedge funds, firstly, for niche ETFs and, secondly, for high liquidity, which allows them to trade large lots. We recently wrote that large investors are suspicious of “free” products and why. For now, Blackrock practice confirms this. But let’s see if the market will force them to reconsider their pricing policy.
Today, the whole world wonders what Trump’s 2 tweets mean, which brought down the Shanghai Stock Exchange index by 6%, and S & P-500 futures by 1.5%. Whether it is such a tactic of negotiations — to shock the partner at the last moment, or a signal of more serious problems in the discussion of tariffs. We do not know for sure, therefore we are more interested in facts. For example, the volume of investment in the American Trezheris from China (in billion $). After several months of falling in 2018 (the “toughest” period of tariff opposition), since December they began to grow again. Perhaps this readiness of China to support its western partner is material, says more than a thousand words. If so, then maybe Trump’s tweets look harsher than they really are. This is not a statement, but thoughts out loud. We think that a certain statement will be made by the response statement of the Chinese comrades, which will not be long in coming.
At the end of April, for supporters of “following the trend” in terms of long-term tactical asset allocation, no changes have occurred. The graph above shows the relative dynamics of different asset classes versus the S & P-500. Schedule for 20 years, monthly. Despite the fact that individual asset classes can grow in absolute terms (such as Europe in April), compared to the US stock market, they consistently remain in downtrends and under 4-year (48-month) averages. This, of course, does not mean that these assets cannot be speculatively attractive in the short term. But this is a topic for other posts. And here we clearly see that so far no «competitor» is becoming more attractive than US stocks. For this I would like to see how the ratio «Active / S & P-500» goes above the 4-year average. This would change the direction of the “big flow” for an asset. So far, Gold and Emerging Markets look the closest to the implementation of this task, but even they may need a few more months to confirm the reversal.
Before the long weekend is not a very complicated schedule from the intermarket analysis. It is no secret that one of the main beneficiaries of a strong and steadily growing market are the companies that serve it, that is, the “broker-dealer group”. They, due to a number of reasons, begin to grow and fall earlier than the wide market, and the ratio XBD / SPX steadily grows during periods of a “healthy market”. It is interesting to look at the current situation in this context. We see that the Brokers / Market ratio (above), despite the historical highs on the S & P-500, has been trading in a downtrend for a year and is still below the 200-day moving average. For some reason, this «insider sector» is in no hurry to rejoice with the broad indexes. We would keep this in mind in the place of the bulls, but without panic. For some reason, because the XBD index in the absolute (below) was able to go above 200 days and is now testing resistance at 274. Its breakdown (if confirmed) will probably pull the relative dynamics of XBD / SPX along with it, which will eventually turn down the trend. growth of the rest of the market.
Investors in bonds, focusing not on credit quality, but on duration, may be useful this schedule. It shows how the absolute dynamics of the US dollar index against the basket of world currencies (above) and the relative dynamics of long US government bonds and the rest of the world (in the middle) interact. It can be seen with the naked eye that in the long-term period (and this is the weekly schedule for 10 years), the directions of these series coincide. The 13-week (this is 1 quarter) correlation between them is shown below. Despite the infrequent short-term periods of divergence, most of the time the correlation is in the range of 0.25 to 1, confirming a high level of interconnection. This means that while the dollar is growing, it is better to keep the risk of duration through long US Treasuries (for example, TLT). Given that the dollar index now draws a breakdown of consolidation at 97.5, there is reason to assume that the TLT tactically returns attractiveness.
As expected, the leadership of the semiconductor sector has become a precursor to new local maxima in the broad market. Since our first mention of the sector ETF (SOXX), it has risen in price already by 15% (S & P-500 for the same period, less than 4%). Is it possible to pause after such growth? Of course, and even likely. But the fact that the recent local maxima in the wide market are confirmed by similar maxima in terms of the SOXX / SPY ratio, increases the likelihood that the market remains in the «risk on» mode. In practice, this means that, despite possible setbacks and corrections, they are likely to buy back and bring the indices to new historical highs (the SOXX / SPY ratio is already there and with a large margin). And you can seriously start worrying about the “bearish” phase when a negative divergence forms between the absolute and relative dynamics of the semiconductors (the same as the one marked by green arrows at the end of December, but in the opposite direction).
Continuing the topic of market statistics, we want to share a chart from Pension Partners. It shows the history of the S & P-500 index from 1942. Gray marked «bull» markets, and pink — «bear». What is there to pay attention to? Firstly, the average result of the bull market (+ 172%) in amplitude is 5 times more than the average result of the bear market (-33%). Secondly, the «bullish» markets are much longer in time, and the current one, in general, is a record holder. Thirdly, the current “bullish” market still gives + 300% on the S & P-500 index and, as we see, the record of the 1990s (+ 400%) is still far away. Therefore, the argument about the exceptional overheating of the market does not make sense.
IMPORTANT: this information is very useful, but only for long-term investors. Speculators can ruin any of these red squiggles, because, in fact, a decrease from -30% to -50% on the index for 1-2 years. In general, this is another argument in favor of the claim that investment is a marathon, not a sprint. And how to use this knowledge, everyone decides for himself.