When it comes to bond market liquidity paranoia, it’s not the dealers we should be worried about but long-term value investors.
So at least says Bloomberg’s Matt Levine in his daily round-robin of what’s going on in the market:
The risk, if there is one, has to be located in what I’ve loosely called the value investors — the people who provide the ultimate bid for assets. Here there are obvious reasons for worry, which frankly I do not understand well enough to have any clear views. But the biggest worries revolve around the possibility of herding among bond investors and around those investors’ funding models. The worry is that there is one dominant model of bond investing, in which giant mutual funds and exchange-traded funds buy and hold every newly issued bond that comes along. Those funds offer their investors the ability to withdraw money pretty much any time they want. But if bond prices crash, investors will want to take their money out, the funds will need to sell, and all those giant bond funds that provided the bid for bonds on the way up will turn into sellers on the way down.
That’s the title of a fascinating new paper from AQR’s Cliff Asness and colleagues, and we honestly couldn’t think of a better headline for this post. The authors present us with a fascinating puzzle: shares of smaller companies systematically do better than shares of big ones. There isn’t any obvious reason why this would be true, yet it is.
Long-suffering fans of academic finance theory might wonder why Asness et al wrote this paper, or why we are discussing it. After all, the idea of a “small-cap premium” has been around for decades and it’s one of the three factors in the Fama-French three factor model of stock pricing. Read more
Bill Ackman there, on most Americans’ perception of short selling. His comments are part of a wide ranging interview in the new issue of Graham and Doddsville, the investment letter put out by students at the Columbia Business School which has a strong value investor heritage.
Also of interest, a few years ago Bill took a long hard look at McGraw-Hill Financial, the publishing group which owns Standard & Poor’s, but passed.
Ultimately, we couldn’t get comfortable with the potential liability associated with being in the bond rating business.
Being a traditional investor sucks, doesn’t it? You give your money to a fund manager, they charge fees and half the time don’t even outperform benchmark indexes.
Being a traditional equity fund manager sucks too. Investors give you their money, expecting you to find a stack of alpha — but at the same time they’re insisting your portfolio allocations don’t deviate TOO much from benchmarks, and getting antsy if your returns fall below trend. Read more
So says SocGen’s resident value investor Dylan Grice, who doesn’t go in for saloon bar nuclear physics.
From his latest ‘Popular Delusions’ note: Read more
No one – not even Warren Buffett – can hope to replicate Warren Buffett, Lex says. His performance has been extraordinary and cannot be explained by luck. Nobody can be expected to replicate this in the future, especially with the current gigantic portfolio managed by Buffett. Quite some shoes to fill for Todd Combs, the hedge fund manager who has been tipped to get started on what is described as a ‘significant proportion’ of that portfolio as Berkshire’s latest new investment manager. Moreover, Combs has about six months in which to show himself worthy before Berkshire shareholders at their next meeting, Reuters says — in which time he’ll have to get used to the media limelight. For his part, Buffett has told the WSJ that Combs is ‘a 100% fit for our culture’.
Bid goodbye to the price-to-earnings ratio, says the WSJ. The ratio, once the holy grail of value investing, is becoming less and less important as economic uncertainty grows. Stocks plunged in the second quarters despite record profits from firms, after all, with the stock market’s average price-to-earnings ratio tumbling by more than a third in the past year. Spreads between analyst forecasts of companies’ expected earnings have also widened from $12 to $15, indicating a broad uncertainty in the market.
Well under a third of stock ratings are now ‘buy’ ratings too, for the first time since at least 1997, reports Bloomberg, with Berkshire Hathaway among them — despite a profits increase of 36 per cent. Economists have still used the heavily discounted P/E ratios to argue that the market has already priced in heavy losses from deflation or a double dip — to no real avail, notes FT Alphaville.