Part of sleeping well at night, if you are invested in the financial markets, is trying to control or set limits on those elements of the financial markets that you can control: expenses and ownership. Being invested through a separately managed account (SMA) allows the portfolio manager to essentially eliminate the fee from consideration by using the tools of asset allocation and tax loss selling that minimizes taxes from recognized capital gains, to allow almost 100% of the annual gain in a portfolio to remain in the portfolio.
Ownership of financial assets is assumed by investors and in advertising, but rarely is it actually true. As with bank accounts where the holder is merely a creditor of the actual owner (the bank), an investment in a “pooled” financial structure (such as a mutual fund) merely creates a creditor position for the investor with the real owners of the assets in a mutual fund, its trustees. When financial turbulence hits, as it did in 2008, it is comforting to know that you can decide whether to sell or hold financial assets without worrying whether the real owner will have your best interests at heart. Staying away from pooled investment vehicles provides that confidence.
For those elements that can’t be controlled, watch. “Investors put a record $11 trillion to work in 2020.” The debate for stock investors at this point is whether to invest pro-cyclically in those companies that will benefit from an economic upturn or stay invested with companies benefitting from the pandemic. Where did that new money go? Only 10% of that $11 trillion went into “stocks,” which includes initial public offerings (IPOs), preferred stock and special purpose acquisition companies (SPACs). Twenty percent went into exotics such as asset-backed securities, high-yield corporate debt, emerging markets and others. With interest rates historically low and even with the risk of loss of value as interest rates rise unless held to maturity, 70% of this new money in 2020 went into investment-grade corporate debt and government debt.
Interested stock investors should be looking for signs that too much money is chasing too few investments. With so much money going in another direction, it may not matter whether your investment manager picks pro-cyclical investments or stays the course until something changes. Both approaches may work well in 2021. Until funds flows change, clients at Woodstock are probably right where they should be.
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William H. Darling, Chairman & CEO
Adrian G. Davies, President