Investment memories are short and decisions are often made on an extrapolation of very recent events and folk memories. We are reminded of the cult of the equity of the second half of the 20th century (better in nominal than absolute terms) and the massive propaganda which supported the share-owning democracy. The morphing of the sell-off of the dot.com bubble in 2000- 2003 into a more general stock market rout was just a price to pay for this lucrative asset class – as evidenced by a secondary rally till the debt crisis exploded in 2007. At that point all risk assets became correlated and fell like stones in a headlong flight for liquidity. And then another secondary rally from March 2009 till May 2010. Hope springs eternal.
Investors wished to believe it is business as usual but with the post-traumatic stress disorder of the financial crisis (see Carmen Reinhart at Jackson Hole); sovereign dangers in the Eurozone; resurgent protectionism and competitive devaluations and a flood of quantitatively eased money into all risk assets, the financial future appears uncertain. And now during the summer and autumn of 2010, we live in a world of “risk-off”, as occurred during the Greek debt crisis of May and mid-summer double dip fears, only to be replaced by the euphoria of renewed QE and now risk-on again. No observer who considered these developments as mad would be open to criticism.
It is against this background Hasley has been developing, alongside two professors and one of their former Ph.D. students at the Cass Business School, an alternative approach to equity investment. At its simplest there is a momentum-driven trend following model which rides equity markets as they appreciate through investment in Exchange Traded Funds but retreats into Treasury Bills when the trend is negative. Equities remain the asset class of choice but only if you have a generation or two to play with.
Much of equity market investment is highly correlated (little difference in holding London or Wall Street) and definitely volatile and un-forecastable. Performance of active funds is seldom better than closet indexing and usually expensive. In this context, in the spring Hasley will launch a series of trend following funds, which (on the basis of 40 years of back-testing) will target much lower volatility and draw-downs but with equity-like returns. There will also be a low fee basis.
In the meantime there are other investment trends we observe at the moment.
One of Hasley’s first “Thoughts of the Week” in early 2007 showed real UK House Price statistics going back as far as 1953 with a clear suggestion there was a housing bubble. If history is to repeat itself it may be 2020 before 2007 prices are seen again in real terms. An average UK property now costs £160,000 and students typically leave university with a meaningless degree that will do little for their earning potential and debts of £25,000. Given that most lenders now want at least a 25% deposit, it is hard to see how young people can begin to climb the property ladder without parental assistance.
