Mike Lipper’s Monday Morning Musings
Investment Markets are Fragmenting
Flows Going to Potentially Higher Risk
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Why the
Fragmentation?
The answer is simple,
salespeople make money by getting investors to make investment choices. At the
institutional level commissions have totally disappeared, and the same largely applies
at the retail level too. However, “vigorish” is alive and well, just with
different names for spreads, underwriting fees, and management fees. Passive
clients may decide at some future point that management fees are not worth it.
A valuable client is
one that is actively investing and directly or indirectly aiding in getting new
active clients. The value of a client
occurs either through the flow of new money or the reallocation of the portfolio.
The marketing agent is consequently a bit of a worrier when communicating with clients.
Furthermore, there is a desire to introduce new investment ideas, particularly
new types of securities or new investment markets. The marketer will often present
him or herself, or their firm, as more knowledgeable than the client. Thus, the
marketer can dominate the client more than they expect.
Performing Better
with More Risk
What follows is a
brief discussion of current possible ploys that might be suggested. In truth
these ideas might be sound if executed when not so popular. If peers already hold
positions in the new play, their length of time to the eventual peak and
subsequent major decline is shorter.
There are a very
limited number of investors who have trading skills, and that does not include
me. Most successful investors hold a relatively small number of holdings for
many years. These are the types of investors who own Berkshire Hathaway with
the goal of transferring assets to heirs after they are gone. (I am one.)
Until perhaps this
week, James Mackintosh a Wall Street Journal columnist, noted that “Four giant
tech stocks added more market value than all other stocks in the S&P 500
for the last month.” I suspect many investors were enticed to buy those four stocks.
Unfortunately for them, the only class of stocks to rise for the week ended Thursday
were small caps. regardless of growth, core, or value orientation.
Many individual and
institutional investors have portfolios consisting of stocks listed on the NYSE,
usually with dividends. These investors might be enticed to invest in NASDAQ
listed stocks due to the greater number of tech stocks. There is a belief that
most short-term NASDAQ traders are better than those playing on the big board.
In the latest week only 23% of NYSE volume fell, compared to 42% on NASDAQ.
The fastest growing
asset class today is Private Investments, either individually or through funds.
As is often the case, the biggest risk is not the issuer, but other holders.
The sponsors of private debt and equity do not have an obligation to buy back securities,
except at the terminal date. The secondary market is very limited, and prices
favor professional dealers.
Jaime Dimon, CEO and
Chair of JP Morgan Chase is worried about inevitable investment mistakes in the
privates. Although he does not see a structural problem, I think there potentially
is one for two reasons.
- These securities are being sold to individual investors. When the public loses money, they often complain to the media and members of congress who are always pro regulation.
- There are very few pension funds still operating. Many have promised fixed returns to government employees, which includes teachers. For years these plans have used interest rates much lower than current rates, many of which have been bought from insurance companies. I believe some insurance companies will go bankrupt if interest rates stay at current levels or go higher, with the retirement burden falling on taxpayers. Politicians are probably better at getting the feds to change regulations. A guaranteed payment funded by a variable (market) sensitive vehicle is dangerous.
What are Your Thoughts?
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