Tonto good for tracking, not for income
by Doug Brodie
/1. Currencies will turn investment stats upside down
Ray Dalio is almost as well known an investor as the Berkshire Duo, he set up Bridgewater Associates almost 50 years ago – at the end of last month it retained its crown as the world’s largest hedge fund, topping the scales at $124.3 billion.
One of Ray’s earliest clients was McDonald's: just before launching McNuggets it worried about the price of chickens going up and squeezing their profits. At the time there was no viable chicken futures market. Ray proposed that the ingredients of a chicken – and therefore the cost of a chicken – were essentially a newly laid chick, corn and soy meal. He combined the latter two into a synthetic future and the McNugget was introduced in 1983, still going strong today.
We recently came across an article written about one of their funds: the All Weather strategy was designed to deliver ‘risk parity’, to ‘hold the portfolio today that will do reasonably well 20 years from now even if no one can predict what form of growth and inflation will prevail’.
The article was looking at the effect of re-investing the fund’s annual dividends, from 2007 to 2024. We thought it would be interesting to see what would have happened to a UK investor using GBP. The fund is run in USD. What we looked at is the return on $1,000 for a US and UK investor, with the latter converting GBP to USD at the start and then back to GBP last month.
The table is a tad detailed – apologies – however it shows the annual growth rate of the USD shares was 5.78% per year, however, the GBP investor achieved 8.48% by owning exactly the same shares for the same time. The difference is that the $1,000 at outset only cost the UK investor £506.90 because the dollar then was virtually 2 to 1. Since then the pound has slipped from $0.5 to $0.79, so not only has the All Weather share itself increased in value, the currency value has also increased. The message here is that it is very important to be wary of adverts & marketing from US providers using their US data converted and portrayed as UK assets.
/2. “If I had a million dollars....”
Bloomberg recently surveyed several of the great and good in the US retail investment market asking where an investor with $1m should be looking. I’m not sure whether or not it’s surprising that they all came up with different ideas. To make it interesting they were also asked what they would do ‘personally’ if they had that $1m as ‘spare cash’, not attached to work.
Lauren Goodwin, chief market strategist, New York Life Investments:
Invest in transitions – meaning areas like electrification, digitisation, AI, carbon activism etc.As an alternate she’d like to hold off spending the $1m until quantum teleportation becomes a thing. (Crikey).
Cue Star Trek:
Andrea DiCenso, portfolio manager and strategist:
Head to emerging markets, and turn the traditional portfolio of 60/40 on its head by putting 60% in fixed income. (See our item below on interest rates). She likes the idea of sovereign debt for that asset class and raises the issue that both the IMF and the World Bank have announced new financial support for the next three years, subject to meeting IMF criteria. She also believes that the evidence of emerging markets coping well without China bodes well for future rest-of-the-world growth.As an alternative she’d ‘put a down payment on a house in southern Italy’ (Ed: how expensive does she think those houses are??). Then she’d buy food from the market every day and cook every day for friends and family.
Eric Freedman, chief investment officer, U.S. Bank Asset Management:
He’d recommend reinsurance due to the increased risks of hurricanes, wildfires and cyberattacks.Alternatively, he’d use the $1m to take every teacher who’d ever taught his family on an all expenses paid trip round the world. (What a nice chap).
Linda Duessel, senior equity strategist, Federated Hermes:
We like Linda – she thinks that for reference the financial world feels a lot like 1996, heading to the 2000 correction, and we agree. AI is not the craze that the dot-com era was but the valuations driven by AI expectations are still pretty ludicrous. She hates AI being referred to as a craze and believes it to be more of a revolution in the same way that the Windows PC reorganised how every business in the world works.That’s where our agreement with Linda ends, I’m afraid, as her use of $1 million would be for her and her husband to take a ridiculously expensive round the world cruise, and carry pockets full of $50 notes to be a big tipper.
David Daglio, partner and chief investment officer, TwinFocus:
David says to buy gas and copper related investments. Copper is based on the continuing build out of both power and data centres, and the unfortunate build up of munitions. He points out that as the data centres will consume large amounts of electricity the quickest way for the world to get power on tap is with gas.His idea in spending $1 million is to buy an RV and go on a road trip through the US, flying in friends to party at various spots along the way (and presumably flying them away again after a couple of days).
/3. Why fixed income won’t work for long term retirement.
This chart shows a UK retail benchmark fixed income fund, run by a wonderfully competent and erudite team. What it shows in the blue line is the income payment each year. The orange line is the starting payment in 2004 that is increased by RPI each year. The chart is self-explanatory:
/4. What trackers are not particularly good at.
We like trackers in the same way that we like Phillips screwdrivers – good at what they do but not for everything. In retirement, our clients tell us that income needs to be reliable, predictable and consistent. The two charts below demonstrate the difference.
