Back in 2015, when the Federal Reserve prepared to raise interest rates for the first time in a decade, there were a few popular narratives in the financial media.
Would the market infrastructure, the “internal plumbing” at the New York Fed and other institutions, be ready? And: how would a generation of young traders , many of whom had never seen a rate rise, react?
We know how that went. Both the plumbing and the young whippersnappers were just fine, as were the legions of investors who love navel-gazing media about themselves.
In 2020, the financial markets face a slightly more serious version of the same question. The past few years brought a rate-hiking cycle, followed by a few years of cutting — and then another round of emergency stimulus. But inflation has stayed low for over a decade now, and the Fed Funds Rate only got to 2.25-2.5%, well below long-time norms, before markets threw a tantrum in 2018, forcing the central bank to start cutting again.
“This time is different,” many analysts say now, pointing to extraordinary stimulus from both the Fed and the government, as well as a huge amount of “pent-up” consumer demand for the past 10 months.
Investing themes are reflecting this sentiment. The 10-year U.S. Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.25% is up nearly 30 basis points in the past month, the financial sector ETF /zigman2/quotes/209660484/composite XLF +1.90% pulled in the biggest haul among all ETFs last week, and small-cap stocks /zigman2/quotes/210598147/delayed RUT +2.11% keep hitting fresh highs.
Time will tell, of course, whether this bout of reflation sticks, unlike the time it got whacked by the coronavirus, or when it fizzled after the 2017 tax cuts, or any number of earlier examples. Time will also tell whether we get that dreaded combination of inflation and stagnation. ETF Wrap doesn’t set out to be bearish, just realistic. This time may, in fact, be different. Or not.
Thanks for reading, as always.
2020 was the year mutual funds started to convert to ETFs , and the early days of 2021 have brought what might be the first hedge fund conversion. The UPHOLDINGS Compound Kings ETF /zigman2/quotes/223575665/composite KNGS +1.22% , developed by former Everlane CFO Robert Cantwell, launched Dec. 29.
The fund, which bears the ticker KNGS, has a straightforward investment thesis: it invests in a concentrated portfolio of what it calls “cashflow compounders: companies generating cash and reinvesting at a higher rate of return than the overall market.” Right now, KNGS’ top holdings are IPO rights to AirBNB Inc., Alibaba Group /zigman2/quotes/201948298/composite BABA +1.47% , Facebook Inc., /zigman2/quotes/205064656/composite FB +2.58% and Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +3.07% .
The strategy did well as a hedge fund, returning 115.2% from its launch in March 2019, through the end of 2020, more than double the roughly 39% gain in the S&P 500 in that time.
Cantwell was an investment manager before helping launch and run Everlane, the online-only fashion retailer. He told MarketWatch that his bifurcated background gives him a unique edge. “Spending half my career as an investor and half my career as an operator helps me see through a lot of BS in financial reporting. I can’t help but draw on that experience any time I’m considering a company for investment.”
Unlike some other active managers, many of whom have spent years trying to find a way to conceal their strategies while making use of the ETF wrapper’s other benefits , Cantwell embraces its transparency.
“I view the ETF as a publicly accountable investment vehicle,” he said, “And I really like the accountability of being a hedge fund manager in an ETF. A lot of ETFs today say we’re going to give you the best exposure we can to an industry or a geography or a theme, but the onus of which category or sector to pick is on the end investor. That to me has gotten a little too far away from the origins of investment management, of holding the portfolio manager accountable.”
In fact, Cantwell expects to follow the example set by one of the most famous and successful active ETF managers, Cathie Wood, by publishing his team’s investment research . “If our portfolio is public, why shouldn’t our research be public?” he said.
Chart above courtesy of Visual Capitalist; original found here .
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