Last week was quieter than normal in the Winston office, and clearly, I had way too much time on my hands given the article below, but I have to say, I felt compelled to pen a short blog on how large companies sometimes struggle to stay on message, causing confusion with potential customers because of conflicting messages about what they truly believe in.
The cause of my confusion, and probably the principal cause of confusion for many investors who rely on the media to make their ‘informed’ investment decisions, was SSGA’s 24 hour press release cycle suggesting why on one hand, we should invest in ETFs during times of high uncertainty and high volatility (apparently this is what investors do during times of market stress based on SSGA’s sales observations) only to be told 24 hours later by the same brand suggesting why investing in benchmarks may not be such a good idea. Huh?
In the blue corner, we have the SSGA ETF team weighing in at 93.5kgs…
January 19, 2016: “ETFs benefit from market volatility”
SSGA’s ETF team suggest that “during times of market uncertainty many investors want (or need) to remain invested in the sharemarket, but higher levels of uncertainty make it more difficult to identify opportunities.” This seems odd. I would have thought that the greater the uncertainty, the greater the opportunity set. My last post highlighted how a number of ‘true to label active managers’ are doing very well in these uncertain times – you can read the blog here.
The article goes on to talk about STW, the S&P/ASX 200 ETF, which is a massively concentrated portfolio that derives the majority of its return (beta) from a small number of economic drivers, unable to avoid them because there is no view being expressed in these products. Thus, as the banks, BHP, RIO get smashed, losing billions in value along the way, we are expected to believe that more investors flock to ETFs, which is contrary to behavioural finance evidence and net flow data (see Dalbar reports) going back decades that suggest investors bail out during times such as these. In fact, the article shows how bad this ETF can be (not great marketing I might add) when it goes on to say, “in fact, this year, our local share market has had one of the worse starts on record with only a handful of stocks on the ASX200 rising. Even Australia’s banking sector, which up until recently has been relatively immune from major global economic shocks, is showing signs of stress with shares in Australia’s largest bank, CBA, falling below $80 in January this year from a peak of $96 in March last year – that’s a 17% loss.”
Yep – by being in this ETF, you just dusted 17% in CBA; a 10% (high conviction) position in STW – a potentially avoidable loss (on paper) by thinking about where we are in the credit cycle…
And in the red corner, we have the active side of the business, weighing in at 93.6kgs…
January 20, 2016: “equity benchmarks too risky amid volatility“
What? I just got told by SSGA that investors look to ETFs during times of uncertainty and high volatility (or at least they want you to believe this), but this SSGA presser says that this is not such a good idea – who should we believe?
Well because the 20 January (red corner) article conforms to my own investment biases, I have to applaud this part of SSGA’s business because it sensibly “urge(s) investors to ignore benchmark weights in favour of a truly active approach amid recent and likely on-going market volatility.”
Yes, you read it right (or was that left)…
And when commenting on the market uncertainty they, “characterise (their) outlook for global markets in 2016 – lacklustre growth, risks skewed to the downside, likely fuelling bouts of investor uncertainty and market volatility.”
As a result of this outlook, the team in the red corner suggest that, “like in 2014 and 2015 we believe that to add value over the coming year we should ignore the benchmark weights and truly be active” because “the Australian equity market is dominated by financials and commodity-related sectors in terms of market capitalisation and for benchmark-driven investors this could continue to create a drag. These sectors were a significant drag on risk-adjusted returns of the benchmark index over the past twelve months, and we believe will continue to add volatility and may depress returns for the year to come.”
So whom should we believe?
Well, the red team’s active share fund has delivered 5.6% p.a. in after fee alpha since its inception in 2009, and has done so with less risk than STW – the highly concentrated index fund… (The numbers don’t lie people).
Where to from here based on this Pulitzer prize winning journal entry?
The truth of the matter (depending on your point of view), is that both products make sense at certain times. The weighting toward passive ETFs and active managers really depends on where we are in the investment cycle. In my view, at this stage of the investment cycle, loading up on ETFs may not be that sensible, but if you believe we are in for a multi year bull market, then maybe they are the place to be. If you believe that we are in for more uncertainty etc, then having some smart managers picking the eyes out of the market to avoid those sectors that are at risk of further losses, also makes sense.
As they say, horses for courses…
Andrew Fairweather, Founding Partner