Financial risks are adding up. Trade battles with China, the surprising vulnerability of Middle East oil supplies, the duration of Hong Kong protests, the drawn-out Brexit dilemma are all drags on business confidence and economic growth. In recognition, the Federal Reserve just cut interest rates for the second time this summer and remains on alert.
Another largely unrecognized concern? In August, for the first time in history, assets in passive equity funds based in the U.S. surpassed holdings in actively managed funds. The most popular passive funds are overwhelmingly dominated by a small group of mega-cap stocks, especially the tech giants such as Microsoft, Apple, Amazon, Alphabet (Google), and Facebook. The fate of many investors’ portfolios hinges on the performance of this small group of mega stocks that have already had a record-setting run.
Global value investor Chuck de Lardemelle explains how he is de-risking his portfolios including the essential role gold is playing in the process.
WEALTHTRACK Episode #1612; Originally Broadcast on September 20, 2019
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How to explain the massive global outperformance of U.S. companies’ profitability and stocks over the last decade? GMO’s Head of Asset Allocation, Ben Inker dug deep and found some surprising answers in his “2Q 2019 GMO Quarterly Letter.”
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CHARLES “CHUCK” DE LARDEMELLE
- Founding Partner, Portfolio Manager,
- International Value Advisers (IVA)
We watch big macro trends for you on WEALTHTRACK which affect the investment climate and your portfolio. Two were accentuated this week.
Another stage of central bank easing is well under way globally with the Federal Reserve playing its part. As telegraphed, the Fed cut its benchmark short-term federal-funds rate by a quarter of a percentage point, 25 basis points in bond market terms, to a range of 1.75%-2% this week. It was the second rate cut this summer. Once again Fed Chairman Jerome Powell cited uncertainty about trade policy as a negative and the strength of the U.S. consumer as a positive. What’s the next policy move likely to be? No direction was forthcoming. Powell said at this point the policy makers are pretty much “going meeting by meeting.”
The drone/missile strikes against Saudi Arabian oil fields last weekend were another reminder of the potential for disruption from multiple danger zones. The surprising vulnerability of Middle East oil supplies, the duration of Hong Kong protests, the drawn-out Brexit dilemma are all drags on business confidence and economic growth. The Organization for Economic Cooperation and Development just cut its world GDP forecast to 2.9%, the smallest annual rise since 2009 when the global economy was pushed into recession by the financial crisis. The Paris-based research group is worried about the debilitating impact of trade disputes erupting around the world, particularly from the U.S. and Europe.
Then there are investment trends. A major milestone was reached last month. For the first time in history, assets in passive equity funds (mutual funds and ETFs) based in the U.S. surpassed assets in actively managed funds. According to The Wall Street Journal, Morningstar reported that as of August 31st, $4.27 trillion in assets were in passive U.S. equity funds versus $4.25 trillion in actively managed funds. This historic shift is still accelerating.
Another less recognized investment phenomenon was analyzed recently in a second quarter quarterly letter to clients from Ben Inker, the head of asset allocation at GMO. Inker, a past WEALTHTRACK guest has worked for years alongside noted market strategist Jeremy Grantham.
The letter was titled “Bigger’s Been Better.” In this case “bigger” refers to the 50 largest U.S. companies by stock market value called mega caps. The “better” refers to their record making earnings and stock performance. As Inker wrote, “U.S. stocks have profoundly outperformed stocks in the rest of the world, whether other developed markets or emerging markets… the largest driver of the outperformance has been the massive superiority of earnings growth in the U.S. relative to anywhere else… the improvement in profitability has occurred only in the largest companies.”
The biggest 10 of the largest top 50 mega cap stocks include the tech names that you all know: Microsoft, Apple, Amazon, Alphabet, the parent company of Google, Facebook. They also include the other, more traditional business powerhouses: Berkshire Hathaway, Visa, J.P. Morgan Chase, Johnson & Johnson, and Walmart.
GMO calculated that their “profit/value” added, meaning their gross profit, (revenues less the cost of goods sold) has increased by 62% since the 1986-1995 decade, whereas the profitability of the next 450 companies improved by 37%, and the next 2500 only 5%.
The other big issue is their stock market dominance. These mega stocks dominate index funds. How they go so goes the major market indices. The logical question is how risky does their clout make the U.S. market?
This week’s guest is known for assiduously avoiding market risk. He is global value manager, Charles “Chuck” de Lardemelle, a founding partner of International Value Advisers, known as IVA, which he and his partner, Charles de Vaulx launched in the depths of the financial crisis in 2008. De Lardemelle has just been promoted to co-chief investment officer along with de Vaulx.
He is co-portfolio manager of their two mutual funds IVA Worldwide and IVA International. Although both funds lag their benchmarks in bull markets they protect in declines and have thus earned Morningstar’s Silver Medalist analyst ratings for their “cautious, patient strategy” …making them “a valid long-term choice for wary investors.”
IVA describes its strategy as “winning by not losing” and looking to “assess risk and try to avoid it wherever possible…” de Lardemelle will explain where he is seeing risk and avoiding it and why gold is playing such an important role in de-risking his portfolios.
If you haven’t had a chance to do so, we would very much appreciate if you could participate in the anonymous survey that you’ll find on the website, too.
Thank you for watching. Have a lovely weekend and make the week ahead a profitable and a productive one.
OWN SOME GOLD AS A HEDGE AGAINST MARKET, ECONOMIC AND CURRENCY DECLINES
THE CASE FOR GOLD
- Protected investors during every bear market but one over the last 50 years
- Anytime markets were in a bear market, gold prices were rising
- World economies are slowing
- Central banks are stimulating
- Corporate and government debt at record levels
No Bookshelf titles this week.
- Own Berkshire Hathaway- can grow value during recessions
- Own gold bullion – historically rises in recessions<
- Antofagasta PLC (ANTO:LN)
- Alphabet Inc A (GOOGL)
- Oracle Corporation (ORCL)
- Mastercard Inc (MA)
- Nestle SA (NSRGF)
- Bayerische Motoren Werke AG (BAMXF)
- Samsung Electronics Co Ltd (SSNLF)
- LKQ Corporation (LKQ)
- Berkshire Hathaway Inc B (BRK.B)
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Chuck de Lardemelle from the WEALTHTRACK archives:
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The ability to change one’s mind is key to investment success says IVA Chuck de Lardemelle.