Kurtosys Insights: Tactical Strategist surveys the asset management landscape

Long time market observer and strategist Jim Welsh has spent many decades watching the markets and sharing his insights in the financial industry through his well-known newsletter MacroTides, which is followed by many of the smartest people on Wall Street. I recently had the opportunity to catch up with him and get his perspective on a few industry topics. One thing I’ve learned when I talk to Jim is that he is never shy or reserved when it comes to discussing any topics – he will definitely let you know where he stands. You’ll find he has a well thought out point of view which comes from decades of deep research on the economy and markets. Here’s what he had to say:

Kurtosys Insights: Tactical Strategist surveys the asset management landscape 1Describe your role as a “Macro and Technical Strategist”

Basically, it’s to process information about what’s going on in individual countries as well as factors that are influencing the global economy and how it affects the US and ultimately feeds into the markets. In the simplest terms, when a market average like the S&P 500 is hitting higher highs and higher lows, it is obviously in an up trend. And when it hits lower highs and lower lows it is in a down trend. More often than not at turning points, the technical will lead the fundamental information. So the technical will begin to weaken, before we get the negative news about the economy, or strengthen prior to good news. Since most strategists predominantly only focus on the fundamental information, they often miss the turning points that have been signalled by technical analysis. My challenge is to identify changes before everyone else has caught on to the coming change. It’s been a big help to combine fundamental and technical analysis rather than only rely on fundamental analysis alone.

What technology/online tools do you use when analyzing the markets?

E-signal and MetaStock Professional. Since I combine technical analysis and fundamental analysis I use this charting program that allows me to include indicators of momentum, relative strength, trend lines and chart analysis.

What are your views on blockchain technology in the funds industry?

We’re at the very beginning of blockchain and people are going to think of ways to utilize it and combine it into their business in ways that right now, we really can’t imagine. The main thing is that we live in a world where security has never been more challenging, so any tool that can provide more security is going to be desired in a way that people run their businesses and their lives. And it will ultimately allow businesses to save on costs.

What are your views on traditional fund factsheets – crying out for disruption or still an essential tool for investors?

It’s a starting point for most investors to get a broad of view of things like sectors. The weakness is that most money managers are bottoms up looking at individual companies or sectors and trying to identify which companies are the leaders in those sectors or having other characteristics that meet the investment objective for their fund. The problem the industry faces is when macro events come into play and are significant enough to swamp all that other information, So, if one isn’t able to understand the macro economy, it really renders all those fact sheets meaningless. So, someone at the end of 2007 could’ve read a lot of those fact sheets, and still lost a lot of money during the financial crisis. Conversely, if they read them in 2009, they could’ve missed the upturn in the market. For example, most mutual fund managers preach a buy and hold philosophy, but valuations are at the third highest level in the last 120 years. Investors may be assuming far more risk than they realize from the information they are being provided on a fact sheet.

Where do you see the asset management industry in 5 years? Is it changing much? How so?

One thing that is certain is that fees will continue to be compressed. They’re being compressed at the low end from robo-advisors who are providing information to investors that primarily don’t have a large investment pool. Fees being compressed at the top end due to poor performance by hedge funds that are being force to lower their fees as a result. But I think the main driver of this whole process is mediocrity because the investment business has a built-in long only bias. During a secular bull market a long only bias is going to thrive, and so will investors. During a secular bear market, the industry suffers because assets can lose 30 – 50% of their value and investors are no longer placated being told ‘the market was down 30% and we were only down 24%, so we actually did a good job for you’. In the long run I think robo-advisors will suffer the same fate. People are drawn to them because of the simplicity, the access online and lower fees. But, the next time the market declines by 30 or 50% and they lose a lot of money, their fascination with robo-advisors is going to diminish, just as it has with traditional investment firms. From a macro perspective there’s just too much debt globally, so the next global recession that is likely sometime in the next five years, will result in a very large decline in equity markets. Central banks will find it far more challenging to stabilize the financial system than after the financial crisis in 2008.

What do you think about the future of ETFs? Is Active dead? Is “Strategic Beta” a fad?

The emphasis in the industry has been to focus on lowering the expense ratio and in a bull market investing in index funds, or sector ETFs with low expense ratios, works fine. The problem with some of the smart beta funds is, as more money gravitates to at least some of those smart beta strategies it could prove self defeating as it makes it more difficult to successfully execute the strategy.

Asset management has not changed in over 30 years. Do you agree?

I don’t agree because 30 years ago there were no alternative investment options for the average investor and today there are many. And, as a result, the traditional 60/40 allocation model has evolved to include up to 20% in alternative funds. Now the average investor does have some access to funds that in the past, they were only for HNW investors.

Why is the US mutual fund market “stuck” on quarterly reporting?

I think a big part of the emphasis is driven by the obsession with quarterly earnings from individual companies. Corporate Executive compensation is skewed so that execs receive more than half of their compensation in stock options. This puts too much emphasis on short term results which has blossomed under the zero rate interest rate policy of the Federal Reserve. In recent years corporations have bought back $4trillion of their company’s stock because they could borrow money so cheaply. This has come at the expense of very low business investment which has adversely effected productivity growth in the the US. Mutual fund managers then are caught up in the game of quarterly estimates that have been manipulated down so that routinely 70% of corporations miraculously beat the estimate.

What is the future for distributors? Are platforms here for the long term?

I think platforms will be here for the long term, but money manager’s mutual funds are going to have to do a more effective job of connecting with FA’s and the public. They will have to provide more access to portfolio managers and more current info so that advisors and investors are more connected and feel more empowered when they make investment decisions.

What does the future “Advisor” look like? A computer or a human?

I think both will exist. The millennial and engineering types of the world will be fine doing business with a computer. But the majority of people will still want the personal touch of a human being that they can talk to and who they believe empathizes with their goals. Robo-advisors are not going to rewire human beings.

Have you watched Sky Atlantic’s Billions? Does it portray the hedge fund industry accurately?

No but when shows about Wall Street make it to the media, its typically near a trend change in the stock market. Paul Macrae Montgomery came up with the “magazine cover” theory. The idea being that by the time a trend had been in place for so long,  it would make the cover of a prominent magazine and signal that the trend was about to end. Kurtosys Insights: Tactical Strategist surveys the asset management landscape 2 In August of 1979 Businessweek ran a cover story called “The Death of Equities” and at the time of publication the DOW was at 833. In June of 2005 Time magazine ran a cover titled “Home $weet Home” which was less than a year before housing prices topped out in the spring of 2006. In August of 2000 the show “Bull” came out on TNT. The S&P was at 1500, less than 3% from its high. By July of 2002 it was 798. I think the appearance of the show Sky Atlantic’s Billions is most likely a reflection of the fascination with Wall Street and suggests the stock market is near a turning point. After seven years of a bull market, a top is coming within the next year, followed by a decline of 30% in stock prices.
If you work for an asset manager and would be open to an interview with Kurtosys, please contact us or tweet us @kurtosys.
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