When does 'Go Big or Go Home' become a problem?
Forget growth vs. value. It seems all that matters is heft.
The Wall St. Journal totally saw me coming when they published a story this week titled: Once a Hot Stock-Market Trend Has a Name, Its Best Days Are Likely Past.
It covers research on acronym companies (you know, FANG, BAT etc.), which tested if these stocks stay hot after the acronym becomes popular. The research argues that, on average, buzzy stocks often surge in the 24 months leading up to acronym's arrival, but that an upside remains up to twelve months after the first mention of their acronym.
The problem is, 'on average' is doing a lot of the heavy lifting here. The pattern for the FANG stocks looked very different to the GRANOLA stocks.
(While on the issue, who approved GRANOLA? For an investment trend? Really?)
I only mention this because recently it's been all about the ‘Magnificent Seven’. And even there, it’s been NVIDIA stealing the show. So we went from a universe of companies, to the top 500, to the top seven, to the one star stock.
This pattern seems to repeat itself not just for stocks.
Just last week we talked about the largest S&P 500 tracker hitting an eye-watering $500 billion in AUM. And earlier this week, news broke that since cutting fees late last year, State Street's S&P 500 ETF fund zoomed up to $10.3bn in assets. We talked about them slashing fees at the time, which led to $1.2bn of inflows within a month.
Is all this concentration bad? Critics have been struggling, given how many active managers fail to consistently beat trackers. But earlier this month, one critic stood up to have his say.
David Einhorn is a well-known value investor, and he gave an interview to Bloomberg, arguing that passive investing equals broken markets, which Morningstar recounts:
"Einhorn had a fantastic track record in the almost 20 years to 2015. Then he had two awful years and three mediocre ones."
When analysing the root cause for underperformance, Einhorn concluded that it was passive investing's fault:
"To keep up with benchmarks and passive funds, active funds are then buying into the same stocks...All of a sudden, the people who are performing are the people who own the overvalued things…they're selling cheap stuff and they're buying whatever the highest multiple, most overvalued things."
Einhorn realised that when he bought cheap stocks that beat earnings, they weren't being re-rated by the market, because they were outside of indices and not included in exchange-traded funds. There were just fewer buyers. So he changed course:
"We're not buying things at 10 times or 11 times earnings. We're buying things at four times earnings, five times earnings, and we're buying them where they have huge buybacks, and we can't count on other long only investors to buy our things after us."
Go big or go home seems to be working in reverse too. This week, St. James Place's stock took a nosedive, falling 33%. The company has about a million clients and manages £168 billion in assets, and it has just announced setting aside a £426m provision to address up to 15,000 claims from customers stating they were charged for services never rendered.
The market wasn't exactly surprised about SJP’s aggressive selling practices; this has been known for years (and presumably somewhat priced in). Arguably, some of the drop in the share price was because investors now expect that SJP will no longer be as big.
Thing is, before a business gets really, really big, it has to go through being just somewhat big. For example, a testament to the London Stock Exchange's recent woes are the 32 companies that have gone private in 2023. City AM helpfully made an infographic showing their size; only six had an individual valuation of more than £1bn.
So, when it was announced this week that a coalition of fintech companies are forming the Unicorn Council for UK Fintech, one had to at least pause at the name.
The coalition is headed by bosses of companies that have achieved this 'unicorn' status, and its stated mission is to:
"Act as a single voice to provide the government with policy proposals aimed at safeguarding the UK’s leading global position in fintech."
It's just that companies, or investment funds, don't start as unicorns. They start small and grow. And it seems the market has lost interest in that kind of narrative.
Treasure Corner: Name your funds with care
Talking about stuff getting bigger, Boring Money revealed this week that the UK DIY investment market hits £392bn. (Five companies now control 70% of it.) The market grew 13.5% last year, a figure worth noting because it’s generally more than the growth most fund houses have been seeing in their own businesses.
Appealing to DIY investors has always been tricky, exactly because of platform intermediacy. Yes, they’re helping distribute your products, but also everyone else's... Still, there are more DIY investors; what can managers do to make their fund ranges more appealing to those buying directly through platforms?
One answer is, start with a good name for your fund. Specifically, make sure it's close to your big-brand company name.
This comes from a 2020 study titled Fund Names vs. Family Names: Implications for Mutual Fund Flows (by Sadouk El Ghoul and Aymen Karoui).
They looked at a sample of 3,495 US equity mutual funds over the period 1993-2017, and asked: for each fund, how close is its name to the name of the 'family name' (meaning the provider's name). For example:
(Consider) “Columbia Growth Fund” and “CMG Fund Trust: CMG Small Cap Value Fund”. They both belong to the same family “Columbia Funds”. However, the first one is much closer to the family name and is easier to associate with the family name."
The researchers measure the distance between a fund name and its family name using a measure that counts the number of single character deletions, insertions or substitutions required to transform one name into the other.
Once they did that, they could now ask whether any of this had any relationship to flows. Lo and behold:
Our results present clear evidence that funds with a name closer to that of the family attract more flows than funds that diverge more widely from the family’s name. The regression analysis, in which we control for several fund characteristics, shows that the distance between the fund and family names is negatively related to fund flow.
Not only that, changes in the fund name that lead to a bigger distance, result in negative flows:
We find that changes in the distance between the fund’s and its family’s names – that are due to fund name changes – are also negatively related to fund-flow changes. Hence, an increase in the distance between the fund’s and its family’s names negatively impacts subsequent fund flows.
Marketers spend a ton of time building the value of the company brand. Casting this value aside when naming a fund is, it would seem, unlikely to help the fund in the long run.
Also Happening
S&P Dow Jones launched new biodiversity-focused benchmarks. Using proprietary S&P Global sustainability data, these indices drill into companies' nature impacts. To some, that's a troubling budding trend:
David Russel, chair of Transition Pathway Initiative, an economic think tank on sustainable transition, warned of the pension sector's tendency to “come up with a bright shiny new thing to invest in”. He thinks nature and biodiversity funds will be the next big thing. Investing in dedicated vehicles, he says, risks pensions funds forgetting about ‘the other 98%’ of assets in their portfolios, which also happen to have nature impacts.
Pictet Group announced it's setting up its very own research institute in Geneva. While the topics are non-specific (the announcement said the plan is to cover everything from macro and geopolitics to portfolio implementations solutions), the angle is about taking the long-term view. One way to see this venture is as a really big investment in marketing, and specifically - in a content niche. Lots of managers say they take the long view, Pictet will have a whole institute to prove it.
European mutual fund managers are wary of entering the ETF market due to high entry costs. Last week we wondered whether the European ETF market lacks competition. Well, a new survey of 127 asset managers found almost all (92%) stated they are planning to launch an ETF business or ‘intensify their due diligence’ in the next two years. In 2021 that number was 9%.