US election is a fund manager’s nightmare
This article was written by Peter Brown and appeared in the Irish Examiner on Monday, November 7 2016
Monday, November 07, 2016
Imagine you had the task of managing $100m of clients’ money, a hedge fund manager in effect.
Peter Brown is owner of Baggot Asset Management.
The difference between hedge fund managers and pension fund managers is they charge smaller fees but take a slice of the profits they make you.
So, when the market is falling your pension fund manager is looking to competitors and provided they are not last on the performance list, have little to worry about.
Clients tend to leave their money with the same pension manager for decades and despite poor performance in some cases, few leave.
Due to the high commission structures on many pensions, the managers make a comfortable living, regardless of performance.
The hedge fund manager, in contrast, only makes an acceptable profit when they make you money, so they are constantly worried about performance.
Now, imagine your morning meeting in your luxurious offices in Manhattan, two days before the US election.
Up to now you were barely concerned because Hillary was going to win and Hillary is a friend of the establishment, the market.
Now, God forbid, Trump could win! You have your clients fully invested in stocks and most of them in dollar stocks.
For your overseas clients this could be a disaster, Trump winning will most likely cause a 15%-20% stock market fall and a 15%-20% dollar fall. You could move them to cash but if Hillary wins you could miss a bounce.
It’s a serious dilemma and the bigger the hedge fund, the bigger the problem. To all of us this US election could have far reaching consequences and for investors they could be immediate. The US economy is traditionally the engine for global growth.
How much that is still the case is debatable; however there is no question that the weak US economic recovery experienced over the last few years, could disappear in a puff of smoke if Trump wins tomorrow night.
So, for investors the landscape could get potentially very difficult. It is already tricky enough without deposit rates but with a stock and bond market rout you better have a good mattress or a secure safe.
The reality is there is little value left in stocks. Valuations are high, the dividend play after tax is negligible and rates are possibly on the rise anyhow.
Being in product uncorrelated with the economic cycle is the only place for the investor currently. Absolute returns funds, the ability to be long or short on a myriad of asset classes is the key. Then it is about being in the best ABR fund available.
For the business owner, a Trump victory throws up a few headaches also. The foreign exchange fluctuations could be large. I can see a serious decline in the dollar, of circa 15%-20%. What would the first 100 days of a Trump presidency be like?
Confusion over policy, international relationships, trade, foreign policy are just some items to get the market nervous.
Would the international bond market still lend to the US in the quantities enjoyed presently? Would we see massive investment withdrawal?
On the flip side, does a Clinton victory bring stability and certainty? It will calm the market for a bit, a sigh of relief if you like.
But there are headwinds, a rate rise is on the cards, not very stock market friendly but the big problem going into 2017 is the oil price.
The other big 2017 theme is central bank low interest rate policy. Policy may shift to a friendlier bank position. That will be a serious shift and very scary for the markets.
The bubble is not on property; this time it is in the bond market. Financial institutions have been gorging on low interest rate debt to gain any return.
If the QE strategy is abandoned it would be easier to empty the Aviva Stadium through one toilet door than to get out of bond holdings. There is a lot to think about for our hedge fund managers and not a lot of time to act.
Baggot Investment Partners – Investing Service
If you are interested in getting a return on your portfolio or have funds to invest please contact us at Baggot Investment Partners and we will be happy to advise you.
Peter Brown is owner of Baggot Investment Partners; Baggot.ie