Over 30 years working in the City and my thirst for knowledge today remains as great as it was on my first steps into the financial markets.
Part of learning to me is keeping up with the industry’s latest trends and innovations and, in recent years, I have found attending the Morningstar Investment Conference in USA (MICUS) most rewarding. I was lucky enough to attend the event again in May and wanted to share the 12 things I learnt from attending MICUS 2019.
Morningstar is developing, and soon to release, a seven-factor model for researching funds, enhancing the traditional two-dimension style box of value and size introduced in the 1990s. The rise of passives has brought factor-based investing to the forefront and it is said that over 300 factors have been identified by academics. My guess would be that many of these are just derivatives of the main factors Morningstar is using – value, size, quality, momentum, yield, volatility and liquidity.
A reminder that when building managed portfolios and looking to diversify by blending funds, make sure you are not simply replicating the market at greater cost. With so many thousands of funds available, many ultimately do the same things, no matter what they might say, so it is vital to ensure you are blending genuinely different styles to get the full benefit of diversification. Clearly a multi-factor tool will help to further differentiate funds and can only help towards that goal.
The outsourcing market in the US for managed portfolios and funds is large and growing significantly, with many of the major asset managers exhibiting fettered and unfettered offerings. The most popular outsourcing propositions are passive or active/passive blending for clients in the accumulation phase and goal-based offerings for decumulation, with Environmental, Social and Governance (ESG) growing in importance across the board.
Passive investing continues to grow its market share in the US, now at 45% and rising. I was surprised to learn this percentage figure is greater in Asia but this is largely due to the fact the Japanese government bought trackers as part of its quantitative easing activity in recent years. Europe, as we all know, remains a fair way behind in this part of the market and lacks the tax advantages that have boosted passive market share in the US.
It is estimated there are a staggering 3.3 million passive funds, which is 70 times more than the number of globally listed equity and debt securities. Morningstar analysts estimate three quarters of these offerings work with one of three major index providers, which has led to some poor pricing behaviour. Investors are fighting back, however, working with other data sources to provide generic indices that replicate the characteristics of the well-known market benchmarks.
We have seen a substantial increase in ESG investing in the UK and a proliferation of funds to meet this demand. It was noticeable that this year at MICUS there were far more asset managers exhibiting sustainable, ethical and ESG products and services. It feels like sustainable investment is gathering pace in the US.
Morningstar may be better known in the UK for providing fund data, research and services but it also undertakes global stock research. Its analysis is currently showing US equities to be around 2% overvalued and the rest of the world 2% undervalued. This chimes with our current ‘US reverting to the mean’ call.
MICUS offers an opportunity to hear speakers from investment and from outside the industry. A presentation by Morgan Housel, a partner at the Collaborative Fund, on psychology of investing was very informative, reminding the audience that good investing is largely about not what you know but how you behave. More often than not, it is emotional mistakes when buying or selling that damage performance rather than economic, political or market risks – meaning it is vital to cut out the noise as far as possible and avoid wasting energy on things you cannot control.
Another excellent speaker, and someone I have heard on a few occasions, is Cliff Asness, the founder, managing principal and CIO at AQR Capital Management. He stressed the importance of transparency when it comes to quant investing: a clear, rather than a black, box. Last year was understandably a difficult year for quants and Asness said when these funds go wrong, it is often hard to pinpoint exactly why, compounding the issues for investors who traditionally want specific reasons for underperformance.
A debate between two emerging market managers focused on the merits of managing funds in a single location against multiple locations, which included a compelling argument for the improvement in standards of transparency and governance in this asset class. As a result, it seems success in active management in emerging markets is now less likely to come from forecasting macro driven shifts to overweight/underweight countries but is increasingly about being in the right sectors and stocks.
I attended my first live baseball game at the famous Wrigley Field to watch the Chicago Cubs play Miami Marlins. I would encourage any sports fan to attend at least one game to participate in a wonderful social occasion and be impressed by the mastery of the art of the sale: beer, hot dogs and snacks. Without wishing to upset my hosts, however, the game rather lacked the action and excitement of my sport of choice, particularly in a week when the two Champions League semi-finals were played.
Travelling home from Chicago, as a Brit, you immediately notice the stark contrast between a US airport departure lounge and the airside parade of retail outlets and eateries that exist in most UK airports. While there is an obvious need for infrastructure spend, we have to remind ourselves that most US travellers use airports for business, almost like bus stations, spending little time or money at them.
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