Friday, August 2, 2019

This week's interesting finds

August 3, 2019 

Oxymoron Alert: some high yield bonds go negative

In the latest sign of financial markets going into uncharted territory, more than a dozen junk bonds, which usually carry high yields, now trade in Europe with a negative yield.

China accounting scandal threatens corporate fundraising

An accounting scandal rocking corporate China is drawing comparisons with the collapse of the US firm Arthur Andersen, as dozens of Chinese companies are forced to halt public listing work.

China is trying to clean up its stock market and they are finding big problems with the way that auditing is being done. A string of auditing scandals this year has shaken investor confidence in Chinese equities at a time when global investors are increasing their allocation to the Chinese market through the MSCI emerging markets index.

MSCI recently increased the weighting for Chinese stocks in its EM index, a move that is expected to lead to an inflow of more than $100bn as investors are obliged to allocate more to China. But critics have said the increase has also increased investors’ exposure to many of the accounting irregularities on the Chinese stock market.

When to Ignore a Fund Manager

The active asset management industry is overpopulated and hugely competitive, and as with any sales activity, delivering the ‘appropriate’ message to prospective and clients is hugely important.  These messages often feel as if they are intended to cultivate a certain image or manage client concerns, rather than present a realistic assessment of crucial issues. 

The types of statements listed below should be considered with a liberal dose of skepticism:

“ESG factors have always been at the heart of our investment process”.
“Markets are not rewarding fundamental analysis”
“I think that interest rates are going to…” 
“I spend 95% of my time at my desk on pure investment work”
“I don’t think we suffer from any biases in our recruitment policy, it just so happens that the best candidates all went to the same universities and look the same”.
“The merger/acquisition/ restructure has not been a distraction”.

If all firms and teams present themselves with a similar sheen, then there is a significant cost to being an outlier that is frank about problems, challenges, and limitations. 

The overplayed world of artificial intelligence

Today’s buzzword is AI. It’s difficult to find a manager that doesn't claim to be using artificial intelligence to improve its investment process.

The generally poor performance of the active management community and the existential threat from “the machines” have managers grasping for a quick fix. Many seem to think that AI offers that solution. 

But many are more likely than not to find their experiments with AI to be expensive distractions. For this reason, don’t discount managers who are avoiding the hype. A manager that honestly admits that it doesn’t see an application for AI in its process may be a realist rather than a Luddite. 

Friday funnies: an EdgePoint partner submission

A major divergence has opened up in my proprietary quant model. Historic correlations are breaking down, presenting a unique opportunity for investors brave enough to take advantage of the temporary dislocation. Yes, it is time to sell avocados to buy Bitcoin!

G(LOW)bal bond yields: