The ‘’Rabbit’’ sculpture by artist Jeff Koons recently sold for a record $91m. It’s been called “…one of the most iconic works of 20th-century art”. A phrase coined by auction house Christie’s. The sale price now holds the record for the most expensive work sold by a living artist. The three foot tall stainless steel sculpture is made to look like a balloon bunny and when it came up for auction in May 2019, various billionaires vied for the highest bid. Reportedly, Stevie Cohen, the infamous hedge fund billionaire was the mystery ‘lucky’ bidder.
The exuberance of the equity markets is often typified by the world of art. As record upon record sales prices are achieved for ever more obscure art, the equity market typically continues to go up and up. High rise buildings also tend to be built higher and higher (currently two record skyscrapers: Jeddah Tower & Dubai Creek Tower are being constructed). Allan Greenspan famously coined the term “irrational exuberance” to describe this type of collective social mood. Today’s adaption is called FOMO – Fear of Missing Out.
FOMO, outside of art, architecture and even fashion, is also on display in the rising popularity of alternative asset classes and exciting investment themes / stories. Three of these are cryptocurrencies, cannabis stocks, and plant-based meat alternative stocks, all of which are trading at unjustifiably high prices. Interestingly, two of the three FOMO assets are listed on the U.S. Equity Market. Consider that:
– In 2018, 80% of Initial Public Offerings (IPOs) in the U.S. were earnings negative. The last time this happened was in 2000.
– The S&P500’s Shiller Price to Earnings Ratio (latest index level divided by prior 10 year average earnings level), is trading at 30x relative to a long-term average of just 16x
– Emerging markets are trading at significantly lower P/E ratios, lower P/B ratios and higher dividend yields than the U.S equity market.
– Value investing has widely been declared dead. Last time this declaration was made on this scale was 1999, before the bubble burst.
– A large portion of US companies are growing earnings per share through expensive share repurchases rather than operational improvements.
– A record $14 trillion of negative yielding bonds have been purchased at the same time that the S&P500 is trading at all-time highs.
Clearly, the U.S. equity market is showing signs of FOMO. This begs the question, for how long will it last? The saying goes that the market can remain irrational a lot longer than you can remain solvent. Fortunately, the fund managers who run the value-based funds held in the Fintax Fund (primarily Contrarius and Lyrical) are strongly capitalised and their investors have been through similar cycles in the past and are remaining invested.
The independent London-based advisory team are, however, continuing to exercise caution when positioning the portfolios. This means that there will be short-term periods of underperformance in pursuit of long-term outperformance. By not jumping on the FOMO bandwagon, most managers who have had any weighting below a full equity weighting to the U.S. equity market has underperformed. The London team are of the view that protecting investors’ capital from permanent loss is more important than climbing on the FOMObandwagon and being fully invested in the U.S.
Below, are the allowed exposures of each of the Funds. This flexibility allows them to manage our investors’ risk of permanent capital loss.
|Equities||0 – 80%||0 – 100%|
|Cash / Money Market||0 – 60%||0 – 60%|
|Fixed Income||0 – 60%||0 – 60%|
|Property||0 – 60%||0 – 60%|
|Alternative strategies||0 – 60%||0 – 60%|
|Commodities||0 – 30%||0 – 30%|
As always, we welcome any questions, comments or queries you may have.