Equities – TurnerStreet

October 8, 2024October 8, 2024 PPD1962 Equities

EQUITIES: Exxon Mobil worth it?

QUESTION: Should I buy Exxon Mobil Corporation (NYSE:XOM)?

ANSWER: Maybe not today, but XOM has a long-term place in any large cap global portfolio.

Why? XOM is just very good at what it does. Over the years it has copped a lot of flack for some of its organisation foibles (rank and yank, single focus, obsession with numbers), but it is this quirkiness that lets it achieve what it does, and what is does is very difficult.

Why not? TSA believes many listed corporations are takeover targets. However, no existing corporation could add value by taking over XOM, so there is no additional price catalyst. What about private equity? They think they are clever, but aren’t smart enough to add value to very technically challenged industry, and the technical folks (e.g. engineers) wouldn’t tolerate it.

Fun fact: XOM was the company responsible to inventing the predecessor of Powerpoint and bullet points. You can still identify ex-Exxon employees by their use of the phrase of “corky dots” instead of bullet point.

Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

October 8, 2024October 9, 2024 PPD1962 Equities

EQUITIES: where are your Chinese stocks?

QUESTION: Where are your Chinese stocks?

ANSWER: We don’t recommend holding any Chinese stock in an equities portfolio.

Essentially, transparency on the economy, markets and companies in China is very low due to reasons most sentient life forms would be familiar with. The conditions could be great; the conditions could be terrible: no one knows for certain. (Actually, if someone says they do know, they are lying unless they are members of the Politburo.)

However, we do know something important about China: the weathly are leaving. This is not like US plutocrats leaving New York for Miami. There are serious issues for Chinese folks to change their domicile so the reasons must be substantial.

TSA posits that conditions to increase wealth in China is now not as great as it was during the time the Chinese emigrants created their first million(s). Hence, if insiders are leaving, why should you invest?

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

October 7, 2024 PPD1962 Debt|Equities|private credit|Private Equity

EQUITIES: which stock should I buy?

QUESTION: The number of listed stocks is falling across many exchanges. Which stocks should I buy?

ANSWER: Your question is the wrong one for investor interested is getting a reasonable return of any given risk preference. The question should be what shouldn’t I own?

Since the nadir of the global financial crisis (“GFC”) in 2009 the listed equities markets have profoundly changed because:

the proliferation of private equity funds;
the increased availability of private debt to companies and investors;
the shift from active management to passive management in public equities’ markets; and,
gamification, rather than investing, by small retail investors.

In short, picking winners requires now requires an even larger edge in information (non-public mostly) and analysis, whereas picking losers in the listed markets requires mostly analysis and public information.

TSA expects the number of listed equities to continue to shrink.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

May 30, 2024May 30, 2024 PPD1962 Asset Allocation|Cash|Debt|Derivatives|Equities

AA: is it ok to have only two asset classes in your portfolio?

QUESTION: I saw this article by JP Morgan’s highly rated analyst. It says people only need two asset classes: global equities and a domestic corporate bond portfolio. Can this be correct?

ANSWER: Yes, and depending on the overall size of your portfolio and your risk aversion to large drawdowns you might just be able get away with one asset class (global equities). Under both scenarios, you will need some allocated to cash for transaction and costs, so technically it will be two or three asset classes.

The JPM analyst quite succinctly explains the global equities and local bond pairing, but I will focus on a global equities only allocation.

Many years ago, I was given about 100 portfolios of HNW individuals to manage. The most aggressive was an all equities (no bonds, quasi bonds or REITS, and minimal cash) but what struck me was the age of the HNW investor. It was a +70-year old woman. After speaking to a few people it was obvious why the portfolio was constructed the way it was.

Firstly, she had been investing for a long time and had been through many drawdowns on her portfolio (Black Monday, GFC, etc). She understood the magnitude of a very large drawdown in percentage terms, but her account balance was large effort that those drawdowns weren’t going to affect her lifestyle (travel, buying gifts for grandchildren, etc).

Secondly, she wanted to leave the largest possible estate and legacy for her family, so was willing to have the most aggressive large cap equities portfolio she could.

So with a single asset class portfolio she achieved her short term plans and long term goals. The traditional advice model for her would have resulted in radically different portfolio and outcomes, with a large allocation to bonds and low risk assets. The message, using the Monty Python line, is that we are all individuals and portfolio construction should be bespoke to you!

Finally, complexity might help someone sell financial products and service, but for the investor simple and low fees can deliver a better outcome.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

April 8, 2024April 8, 2024 PPD1962 Equities

Equities: if everyone is going passive, why shouldn’t I?

QUESTION: I saw this article in The Economist. If everyone is going passive equities, why shouldn’t I ditch my active equities manager?

ANSWER: You probably should ditch your existing active equities manager, but don’t put the money into passive funds.

Firstly, as background, let’s not pretend that traditional active managers were not the catalyst themselves for the growth of passive investing. Active managers were constructing portfolios with poor return/risk characteristics, and charging too much. Their objective was raising funds under management (“FUM”) from investors which required top decile performance….do you realise how much risk you need to take to get to top decile in any quarter, and is it any surprise that the volatility will mean bottom decile performance regularly too?

Family offices and HNW individuals will eventualy realise that active management can be done differently, therefore avoiding the perils of passive fund investing, and the poor return/risk characteristics of traditional active managers.

You are invited to join the family office of TurnerStreet’s founders in a new form active equities management where the risks match the returns. The objective is not to shoot the lights out, but to do a little better than the index over the long haul.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

March 2, 2024April 8, 2024 PPD1962 Asset Allocation|Equities

AA: should you put all your savings into stock?

QUESTION: I saw this article in The Economist? Should I put all my money into stocks (equities)?

ANSWER: It really depends on how rich you are.

If you are poor, you need money for the basics: food; shelter; and, clothing. If you have cash, you aren’t going to risk it on buying risk-assets; crypto currencies; or, even, lottery tickets (although some hard-core pragmatists would argue that makes sense).

As you get richer, you want to spend more on yourself now and in the future, so you need to think about investing (returns and risks) and how that will correlate with your spending for needs and wants. At this stage having some equities makes sense.

Get even richer, and you need to add legacies (for family, friends and philanthropic interests). Hence, you are interested in longer term returns and can wear the fluctuations in the markets for risk-assets.

Let me give you an example of an 80 year old woman; she owns a beautiful house ($15m); her investment portfolio is $11m; has about dozen grandchildren, etc; and, has some philanthropic interests. This investor put all her money into equities and every year, despite market fluctuations, has spent more on Christmas presents for her family, spent more on other discretionary expenditures, each year. With measured drawings, and long term returns of equities, she has optimised her utility. The size of her portfolio compared to drawings means bear markets have been irrelevant to her.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

February 25, 2024February 26, 2024 PPD1962 Equities

EQUITIES: which portfolio benchmark?

QUESTION: which is the best portfolio benchmark for an equities portfolio?

ANSWER: Depends on your risk and return preferences, and market outlook.

Market-neutral equities portfolio may be the best when there is a risk of a market downturn (exaggerated by passive funds),

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

February 15, 2024 PPD1962 Debt|Equities|Realty

EQUITIES: are American banks a concern?

QUESTION: Property is in a hole, interest rates are going up and we have crazies in control (or not in control) of parts of the US government, so are you concerned about US banks?

ANSWER: Yes.

Maintaining bank stock multiples is about confidence and there is a lot to be concerned about in the US:

recent political activity (border and military bills) suggests that Republicans would now generate a real crisis if it damaged the Democrats’ prospects in this year’s elections, and causing a debt crisis is the biggest possible crisis (although some think it would blow back on the Republicans);
interest rates aren’t going down, and likely to go up, this year due to low unemployment and higher inflation;
property defaults are going to happen;
the US government needs to get debt levels down and it isn’t going to happen without structural reforms; and, finally,
unlike most banks in OECD countries, the US runs theirs on socialist principles with respect to house mortgages but free-enterprise principles for bank executive remuneration, and this creates a moral hazard that eventually governments will not want to continue funding!

The bottom line is that US banks will need more capital over time. Although some US banks are better than others, it is difficult to justify any except Morgan Stanley.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

December 27, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Realty

Debt: why equities folks follow it.

QUESTION: TSA do asset allocation only between cash and equities portfolios, so why are you interested in government debt?

ANSWER: Like it, or not, most investments are based off US Treasuries, so we need to abreast of what is happening. Recently, there was a good article that we would direct you to for an update: see this link. The US Treasuries are often used for the risk-free rate, which helps us determine the value of equities and their alternatives.

However, given the political instability in the US, maybe it will not be the risk-free rate in the future that investment managers use. Ironically, there is a significant proportion of the 74m of Americans who voted for Trump in 2020 who would prefer Trump over democracy. That is a huge number and the risk is that those Trump supporters have filtered into all elements of society: the Supreme Court; lower court; Congress; local election officials; et al. If that sounds familiar, think of Hungary, Turkey and Poland.

Finally, although TSA limits itself to cash and equities, we also like realty, specifically freehold land where the investor has local knowledge. However, most TSA clients already do land investing themselves, so we cannot add value, except to recommend freehold over leasehold or strata property (we will expand on that later).

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 27, 2023 PPD1962 Derivatives|Equities

Equities: large cap stocks are not boring!

QUESTION: People say most of the gains are made in small cap stocks and the large cap indices are boring. Is this correct?

ANSWER: No. “People” who say that are small cap equities managers with a vested interest, or idiots who have never looked at the data.

Below is a table that comprises the 1 year price movements of the five best, and worst, performing stocks in the S&P Global 100 index and its tracker exchange traded fund (“ETF). The range was +189% to -41%, with the benchmark at 17%

Name	Change % (1Y)
NVIDIA Corporation	189%
Broadcom Inc.	83%
Mitsubishi UFJ Financial Group Inc.	67%
Eli Lilly and Company	66%
Banco Bilbao Vizcaya Argentaria S.A.	60%
iShares Trust – iShares Global 100 ETF	17%
Anglo American plc	-31%
Roche Holding AG	-32%
Bristol-Myers Squibb Company	-37%
Pfizer Inc.	-38%
Bayer Aktiengesellschaft	-41%

Source: Koyfin data.

What the table shows is there plenty of excitement for stock picking in the large cap. However, unlike the small cap benchmarks you can short the 100 largest companies in the world if you think they are losers easily, and cheaply, with derivatives. Try that with small cap stock (anything less than a $1bn), or microchip stock.

ACTION PLAN:

If you still don’t understand how diverse the possible outcomes in any investment benchmark are, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy, or sell (short). For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying/selling individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio. Also, it may mean not holding any equities (as even cheap stocks go down when the tide floods out).
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.