See full coverage of the Morningstar Investment Conference here.
At the Morningstar Investment Conference in London last week, no fewer than 24 well-known investment managers imparted their knowledge to the audience of 400+ advisers and financial professionals.
Here is a selection of some of our favourite ideas and comments (paraphrased for easy reading!)
Macroeconomy
UK Stimulus – When Will We Realise It’s Bad News?
The UK government issues cheap Treasury debt. The banks then buy this debt. The UK government buys it back from the banks in order to recapitalise and/or encourage lending. The result is that the UK government owns 30% of its own issued debt and this is called Quantitative Easing. This can’t be sensible; when will someone wake up and realise that it’s not?
US Stimulus – Can’t Stop, Won’t Stop
Through Fannie Mae and Freddy Mac, over 90% of all retail mortgages in the US are written by the government. The US government is buying $85 billion of Treasury bills per month. These stimulus measures are supporting the equity and credit markets. The mere suggestion of that process slowing or stopping, let alone being unwound, could be calamitous to both.
UK Coalition to Collapse Come Budget Time
The effective political collapse of the UK coalition is on the horizon. In particular, the Tories can’t pass through the 2014 budget without prepping for the election, which will mean (more) spending cuts and (more) tax giveaways. This will be unacceptable to the LibDems and will cause the coalition to split, leaving the Tories in a minority government for 10+months. Stewart Cowley.
Is Recovery Around the Corner?
Macro indicators are very suggestive that growth will be stronger by the end of year than people expect. The whiff of success implies that real interest rates will not stay negative for ever. Maybe the strength of gold means the turnaround is round the corner.
Investing for Income
Equity Income Over Fixed Income
Equity income is increasingly a better bet than fixed income, although sustained income growth is to be favoured above short-term income spikes as the latter is more reflective of distressed balance sheets rather than genuine return on investment.
Safe Haven Investments Aren't Safe
The price of holding fixed income investments is very high compared with the relatively paltry yield, so if fixed income (governmental or corporate debt) is seen as a risk hedge, it is a very expensive one and in fact probably doesn’t provide much real risk cover.
The Importance of Being Picky
Correlations within markets have fallen in the last year. There’s a real chance that for the first time in about five years stock selection matters.
High Dividend Yields Should Be a Warning
High yielding equities, in the main, are rubbish. That’s why they have a high yield, because they’re distressed. One can’t invest passively in this area – it will lead to holding much more volatile stocks. The high-yield dividend index performs no better than the global index, investors so have to be active to pick the right companies.
Most Popular Is the Most Overvalued
Emerging market debt remains very popular but the major flaw of its popularity is that it earns the lowest yield that it ever has in history. It’s the most overvalued asset class in the fixed income space. But then all income-generating assets have become quite expensive, not just fixed income.
Companies Will be Conservatively Run
What we want from our equities today (i.e. income) is different from what we wanted five years ago (i.e. debt-fuelled growth). This means that directors of listed companies know they need to have a nice steady dividend, which requires a nice steady balance sheet, which requires leverage. Holistically, this suggests that most companies will be very conservatively managed.
Investor Behaviour
Putting Decisions in the Hands of Investors
The development of the ETF industry is moving control away from fund managers and towards IFAs and end-investors. Investors now longer have to buy an emerging market fund and let the manager select the regional asset allocation, now investors can use ETFs to allocate between, for example, Indonesia and Mexico.
Markets Are Not Efficient
Market efficiency has been refuted time and time again. Behavioural finance has shown that there are irrational investors. Stock market prices are far too volatile to be explained by the volatility of their fundamentals. So, markets are inefficient.
Forecasting the Future Tells You the Past
The problem with human beings’ forecasts is we’re horrible at it. Research has shown that the average consensus forecast essentially tells us what happened last year—our forecasts replicate what happened 12 months previously. Forecasts are wrong by an average 8% per annum. Consensus fails; the alternative is to be contrarian, but that comes with a lot of pain.
Being Contrarian Really Hurts
Contrarian investing involves going against the herd. Scientific tests have shown that the feeling of being ostracised stimulates the same part of the brain as pain, therefore being ostracised—being contrarian—actually hurts.
Be Fearful When Others Are Greedy…
When world the world is going to end, equities tend to provide much better returns than they have historically: it’s time to buy. When the world outlook is very positive, equity performances tend to be average or worse: time to hold/sell.
The Trend of DIY Investing
Only 10.8 million people in the UK hold a risk-based investment. Only 40% of those find investing at all interesting or enjoyable. 3.4 million people never have, and won’t consider, getting financial advice; 1.5 million have and do receive financial advice; the rest dip in and out (task-based advice). That leaves a huge role for DIY investing websites, platforms and ‘guided architecture’ advice.
