Q3 2019 Commentary

Cheap Money, Expensive Storage

Earlier in the week various users found a glitch in Robinhood, the stock trading app for millennials, that allowed them to trade stocks with infinite leverage. Essentially, Robinhood funded their traders’ trading positions for free by providing them with unlimited capital. One trader on their platform bragged about funding a $1 million position with a deposit of only $4 000. Trading on extreme leverage is rarely a good idea. 

The Robinhood story is apt for the times. The market is flush with free money due to low and even negative interest rates. The thing about free money is that 1.) There is currently a lot of it, and 2.) It has to go somewhere. 

The larger the amount of money, the more difficult it becomes to safely store. Ask Pablo Escobar. His illicit operations reportedly earned him $70 million per day (roughly $26 billion in a year).  That’s a lot of money to find a home for. His strategy was to buy houses and to fill the walls with stacks of bills. He also buried some of it in plastic bags in backyards and forests. Most of it ended up being eaten by rats and ruined by weather. Retrospectively, his storage strategy was probably not ideal.

Large investment managers face a similar dilemma. Investors are pushing free money (due to prolonged quantitative easing) their way for onward investment. These investors aren’t spending it in the real economy by consuming i.e buying things (as was intended by the economists at the big central banks). Large investment managers, therefore, have to invest this capital on behalf of their investors somewhere, even if it means investing it in companies that don’t need it to operate or grow and probably won’t be delivering outsized returns in the future. 

Many startup technology companies as well as big brand listed companies are, therefore, receiving significant amounts of excess capital being pushed their way, and they don’t really know what to do with it. These companies are trading at record multiples of revenues, earnings, book values and free cash flows with relatively poor returns on reinvested capital. One of the things these companies are doing with all this excess capital is buying back their shares in the market, but at very expensive prices, driving up the share prices of the remaining issued shares even further. Similar to Pablo’s situation, these types of companies are probably not a great place to store capital for the long-term.

But what’s the alternative?

Some investors view the debt markets as a better storage mechanism for these large pools of capital. Currently, $19 trillion of debt is negative yielding, meaning that investors are prepared to pay for the right to lend their capital to others. These investors are willing to invest $100 now and are prepared to receive $95 back at the end of their investment’s term. One of the reasons they are willing to do so, probably has to do with fear. They think that locking in a largely known loss in the present is probably better than suffering an unknown, potentially greater, loss sometime in the future in a more risky equity market. Still, it doesn’t sound like a great place to store capital. 

Investing with a manager who can find cheap, relatively safe investments during this unique situation is, therefore, particularly valuable.

The London advisory team have done well to safely store and then navigate your invested capital in the Fintax Funds through these risky markets. By blending different fund managers who follow different investment styles (core, growth, value, quality) as well as blending different asset classes, they are effectively managing the risk of our investors.

As always, we welcome any comments, queries or questions you may have.