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Gurus Worried, What Should Sovereign Funds Do?



Carl Ichan. Bill Gross. Jeffrey Gundlach. Stan Drunkenmiller. Get the picture?

samurai2Several prominent investment gurus have recently made public comments regarding the state of the markets – playing a bearish tone of what is to come. Even investment banking mammoth Goldman Sachs gave a warning signal, as well as GOP U.S. Presidential candidate Donald J. Trump chiming in on August 2, 2016 on Fox Business, “I did invest, and I got out, and it was actually very good timing.”

More and more asset owners are anticipating a world where listed equities will no longer be substantial enough to carry returns for their expanding liabilities. While this monstrous shift in institutional investor asset allocation has lushly lined the pockets of alternative mangers, it does draw concern about the effectiveness of the major asset classes. This was clearly demonstrated in the latest fiscal year returns of CalPERS, Temasek Holdings, CalSTRS, China Investment Corporation, Abu Dhabi Investment Authority, etc.

I would also recommend analyzing the investor base of bond and equity markets in China, Japan, eurozone, Malaysia and other markets – central banks and other official institutions are becoming a larger part of the institutional investor mix.

Important Questions

While the famous investment gurus, the ones who manage billions for others and themselves, have called out or signaled that U.S. equity markets are sitting on highs – not being backed by fundamentals. Will the equity markets continue to rally on such factors as central bank policy and bipolar employment figures? Have listed companies properly used cheap corporate debt to innovate, spend on capital expenditures efficiently to generate organic sales versus stock buybacks and more mergers and acquisitions? In June, the trade deficit of the United States spread further apart to a 10-month high at US$ 44.5 billion, according to U.S. Department of Commerce figures. When will the dance end? The investors who can answer this questions will profit handsomely. I would also recommend analyzing the investor base of bond and equity markets in China, Japan, eurozone, Malaysia and other markets – central banks and other official institutions are becoming a larger part of the institutional investor mix.

Here are some statements from respected financial gurus:

Stan Druckenmiller, May 4, 2016 – The 21st Annual Ira Sohn Conference
The lack of progress and volatility in global equity markets the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter. While policymakers have no end game, markets do.

Jeffrey Gundlach, July 29, 2016 – Reuters Interview, ‘Sell everything,’ DoubleLine’s Gundlach says
“The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

Bill Gross, August 3, 2016 – Masters and Johnson Q&A
What should an investor do? In this high risk/low return world, the obvious answer is to reduce risk and accept lower than historical returns. But don’t you have to put your money somewhere? Yes, of course, except markets offer little in the way of double digit returns. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.

Opportunity for Sovereign Wealth Funds

With terms surfacing such as ZIRP (Zero Interest Rate Policy) and NIRP (Negative Interest Rate Policy) in pension board documents, replacing NINA (No Income No Asset) and NINJA (No Income No Job No Assets) in the press, yield-minded investors are cautious as ever, giving a blow to smart money confidence. Market confidence, a factor not used so much in smart beta, I believe is what asset owners should be looking at. Which major investor will leave the table first, after a negative swan-like event occurs? Currently, a number of large wealth funds and pensions have been moving money out of developed equities, into more liquid assets, at the same time, plunking down mounds of cash into real estate, infrastructure and venture companies. Sovereign funds are long-term investors (yes, we all know), which many have the ability to be contrarian investors, buying when there is panic. The Buffett-like wealth funds have the balance sheets to acquire real estate assets, even willing to except lower cap rates than fund investors. There will be a point in which a sovereign fund will say “no” to a core real estate asset.

However, will the next dip in equities be a short-term move to capitalize on or a deep lengthy downward move to lows?

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.

SWFI First Read, September 21, 2018



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